W I T N E S S E T H:

Startup Financing Report 2013-02-25

 

Startup Financing Report

2013-02-25

( for the Week of 2013-02-18 to 2013-02-24 )

The Startup Financing Report is published each Monday on WITNESSETH: Law, Deals, & Data. This Report tracks startup-company financing activity reported during the prior week. The data is based on Form D disclosures filed with the Securities and Exchange Commission. The individual deals underlying the data can be accessed here for new companies, here for all companies, and here for venture capital funds. The numbers in this beta version of the report are preliminary and subject to later update.

Weekly Synopsis:

Capital raising by startup companies was down modestly this week from last week, but is mixed compared to the same period last year. Venture capital fundraising is up sharply this week thanks to Battery Ventures raising $900 million in two funds. See the venture capital funds page for more details.

All Operating Companies Raising Money
	Weekly	% Change from Week Before	% Change from Same Period Last Year	Year to Date Total
Number of Deals	165	-23.6 %	6.5 %	1,449
Total Offering Amount	$ 764,494,104	-20.1 %	13.8 %	$ 6,934,230,940
Total Amount Sold	$ 346,028,251	-51 %	-27.64 %	$ 5,106,624,111
Total Number of Investors	1,456	-18.8 %	11.7 %	15,467
* Total Offering Amount is the total size of the offering. Total Amount Sold is the amount of the offering that had been sold as of the report date.

New Operating Companies** Raising Money
	Weekly	% Change from Week Before	% Change from Same Period Last Year	Year to Date Total
Number of Deals	98	-22.2 %	19.5 %	837
Total Offering Amount	$ 561,852,729	-21.3 %	19.8 %	$ 4,985,237,743
Total Amount Sold	$ 201,136,871	-51.9 %	-37.39 %	$ 3,153,566,528
Total Number of Investors	618	-46.7 %	-10.4 %	8,459
* Total Offering Amount is the total size of the offering. Total Amount Sold is the amount of the offering that had been sold as of the report date. ** New Operating Companies are those that have not previously filed any SEC documents.

Venture Capital Funds Raising Money
	Weekly	% Change from Week Before	% Change from Same Period Last Year	Year to Date Total
Number of Financings	8	-27.3 %	100 %	69
Total Offering Amount	$ 1,035,328,330	246.3 %	263.4 %	$ 8,818,616,700
Total Amount Sold	$ 900,328,330	212.9 %	226.91 %	$ 7,068,921,424
Total Number of Investors	229	23.1 %	593.9 %	1,198
* Total Offering Amount is the total size of the offering. Total Amount Sold is the amount of the offering that had been sold as of the report date.

Legal Structure of Operating Companies
	New Operating Companies		All Operating Companies
	2012 Totals	2013 Year to Date	2012 Totals	2013 Year to Date
Corporation	38.6 %	36.3 %	51 %	47.5 %
Limited Liability Company	49.5 %	51.3 %	38.7 %	41.1 %

 

Archived Startup Financing Reports
2013-02-25	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-02-18	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-02-11	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-02-04	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-28	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-21	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-14	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-07	Startup Financing Report	All Companies	New Companies	Venture Funds

 

Notes: For information about the methodology used in this report, see here. For answers to frequently asked questions about this report, see here.

That's Right: Yet Another Post on Law Review Rankings

Google Scholar Metrics has ranked law reviews, and just in time for the spring law review submissions season. In a previous post I discussed Google Scholar's ranking of the top 20 law reviews.  In another post, I used the Google Scholar Metrics data to produce a list of Google's most-cited law review articles in top-20 journals for the last five years.

In this post, I expand the original rankings of the law reviews to include Google's ranking for many, many more publications.  I have attempted to include as many law reviews as possible (specialty and general, as well as peer-reviewed) with h-indices over 10. Because journals below the top 20 are not available in a list from Google I searched for them individually, which means that I am sure that I have left some out. You can search Google Scholar Metrics to find the place for any other journals not listed and put them where they belong in your own ranking scheme.

The table below ranks each law review according to its h-index in Google Scholar. The final column gives the rank according to the W&L Combined 2005-2012 rank. The h-index is used as the primary rank (following Google's approach), with h5-median as a tiebreaker, and W&L ranking as a further tiebreaker. Note that Google's ranking is based on articles published from 2007 to 2011 and is calculated as of November 15, 2012.

The h-index used by Google to rank the journals is a valuable measure, but it has advantages and disadvantages, which are well summarized in the Wikipedia entry on the subject. One disadvantage in particular is that the index does not penalize journals for publishing many articles that are cited rarely or not at all. The Google data itself is also often inconsistent as to names and dates, so drawing inferences at a fine-grained level about individual authors or articles can be treacherous without further research.

The rankings largely parallel the widely known Washington and Lee Law Journal Rankings, but with some incredible outliers. The Journal of Law & Economics is ranked as a top-20 journal by Google, but is ranked #382 (!) by Washington and Lee. I would render a verdict in favor of Google's ranking on that one. Overall, it seems that the W&L rankings tend to rank interdisciplinary journals lower (e.g., the Journal of Empirical Legal Studies and the Law & Society Review which are ranked 150 and 237, respectively, in the W&L rankings but in the top 50 journals according to Google). But Google seems to get some journals wrong as well, likely putting Yale too low and not even producing a ranking for well-known journals such as the Harvard Journal on Legislation, the Yale Journal on Regulation, or the Supreme Court Review.

Here are the rankings. Please feel free to comment with any corrections or major omissions. Note that the table cuts off at a Google h5-index of 10, which I used simply as a round number and not as a judgment about journal quality on my part. I will keep this table at the top of the blog for the next couple of weeks during the submissions cycle.

Click on the link under any journal's name to see a listing of the most cited law review articles in the journal between 2007 and 2011.

Updated 2014 rankings here!

Google Rank	Law Review	Google Scholar h5-Index Score	Google Scholar h5-    Median          Score	W&L Combined Rank 05-12
1	Harvard Law Review                         (most cited articles)	44	71	1
2	Stanford Law Review                         (most cited articles)	44	67	4
3	Columbia Law Review                       (most cited articles)	43	70	2
4	University of Pennsylvania Law Review (most cited articles)	41	70	8
5	Michigan Law Review                       (most cited articles)	38	65	6
6	UCLA Law Review                             (most cited articles)	38	59	7
7	Texas Law Review                           (most cited articles)	38	55	9
8	Yale Law Journal                                   (most cited articles)	38	53	3
9	Georgetown Law Journal                   (most cited articles)	36	63	5
10	Virginia Law Review                         (most cited articles)	36	55	10
11	California Law Review                       (most cited articles)	35	45	12
12	Minnesota Law Review                     (most cited articles)	33	53	18
13	Duke Law Journal                                 (most cited articles)	33	52	21
14	University of Chicago Law Review             (most cited articles)	33	44	24
15	Northwestern University Law Review   (most cited articles)	32	49	16
16	University of Illinois Law Review           (most cited articles)	32	45	27
17	Iowa Law Review                             (most cited articles)	31	54	17
18	Cornell Law Review                           (most cited articles)	31	50	15
19	Journal of Law & Economics              (most cited articles)	30	51	382
20	Notre Dame Law Review                   (most cited articles)	30	45	13
21	UC Davis Law Review                       (most cited articles)	30	39	29
22	New York University Law Review             (most cited articles)	29	54	14
23	American Journal of International Law (most cited articles)	29	51	56
24	Vanderbilt Law Review                     (most cited articles)	28	49	20
25	Boston University Law Review             (most cited articles)	28	42	22
26	William and Mary Law Review             (most cited articles)	28	40	19
27	Fordham Law Review                         (most cited articles)	28	39	11
28	George Washington Law Review               (most cited articles)	27	39	31
29	Hastings Law Journal                       (most cited articles)	27	37	35
30	Cardozo Law Review                       (most cited articles)	27	35	23
31	Boston College Law Review               (most cited articles)	26	36	24
32	Iowa Journal of Corporate Law           (most cited articles)	25	42	72
33	Journal of Empirical Legal Studies           (most cited articles)	25	40	150
34	North Carolina Law Review                       (most cited articles)	25	38	28
35	Emory Law Journal                             (most cited articles)	25	38	31
36	Berkeley Technology Law Journal             (most cited articles)	25	37	60
37	Indiana Law Journal                             (most cited articles)	25	36	34
38	Journal of Legal Studies                     (most cited articles)	25	36	82
39	Arizona Law Review                         (most cited articles)	24	38	50
40	Connecticut Law Review                     (most cited articles)	24	34	41
41	Law & Society Review                         (most cited articles)	24	34	237
42	European Journal of International Law (most cited articles)	23	32	124
43	American Journal of Comparative Law (most cited articles)	23	31	63
44	Southern California Law Review             (most cited articles)	22	40	33
45	Lewis & Clark Law Review                         (most cited articles)	22	28	70
46	Harvard Civil Rights-Civil Liberties Law Review                                               (most cited articles)	21	36	41
47	Virginia Journal of International Law         (most cited articles)	21	36	53
48	George Mason Law Review                 (most cited articles)	21	34	77
49	Houston Law Review                       (most cited articles)	21	31	57
50	Florida Law Review                           (most cited articles)	21	30	38
51	Wake Forest Law Review                   (most cited articles)	21	30	40
52	Ohio State Law Journal                           (most cited articles)	21	30	51
53	Wisconsin Law Review                       (most cited articles)	21	29	26
54	Tulane Law Review                           (most cited articles)	21	29	69
55	University of Colorado Law Review           (most cited articles)	21	26	49
56	European Law Journal                       (most cited articles)	20	43	641
57	American Journal of Law & Medicine         (most cited articles)	20	33	208
58	Law and Contemporary Problems             (most cited articles)	20	30	106
59	Alabama Law Review                       (most cited articles)	20	29	66
60	Chicago Journal of International Law   (most cited articles)	20	28	77
61	Washington University Law Review         (most cited articles)	20	27	30
62	American University Law Review         (most cited articles)	20	27	39
63	Buffalo Law Review                         (most cited articles)	20	26	84
64	Fordham Urban Law Journal              (most cited articles)	20	26	101
65	DePaul Law Review                         (most cited articles)	20	25	65
66	Georgetown Journal of Legal Ethics         (most cited articles)	20	25	91
67	Washington & Lee Law Review             (most cited articles)	19	35	51
68	Harvard Journal of Law & Public Policy (most cited articles)	19	33	48
69	Utah Law Review                             (most cited articles)	19	31	89
70	Harvard Law & Policy Review               (most cited articles)	19	29	80
71	Ohio State Journal of Criminal Law         (most cited articles)	19	29	107
72	SMU Law Review                               (most cited articles)	19	28	139
73	Georgia Law Review                         (most cited articles)	19	27	75
74	American Business Law Journal               (most cited articles)	19	27	99
75	Nevada Law Journal                         (most cited articles)	19	27	130
76	Law & Social Inquiry                         (most cited articles)	19	27	185
77	American Criminal Law Review          (most cited articles)	19	26	101
78	Delaware Journal of Corporate Law     (most cited articles)	18	28	93
79	International Journal of Constitutional Law (most cited articles)	18	28	292
80	Journal of Criminal Law & Criminology    (most cited articles)	18	26	57
81	Missouri Law Review                        (most cited articles)	18	26	121
82	Hofstra Law Review                          (most cited articles)	18	24	68
83	Brigham Young University Law Review  (most cited articles)	18	24	86
84	University of Pennsylvania Journal of Constitutional Law                          (most cited articles)	18	23	74
85	Akron Law Review                           (most cited articles)	18	23	75
86	Fordham International Law Journal         (most cited articles)	18	23	149
87	Pepperdine Law Review                     (most cited articles)	18	20	89
88	Administrative Law Review                       (most cited articles)	17	29	88
89	University of Michigan Journal of Law Reform                                             (most cited articles)	17	25	111
90	Santa Clara Computer & High Tech. L.J.   (most cited articles)	17	25	126
91	Kansas Law Review                         (most cited articles)	17	25	130
92	University of Richmond Law Review           (most cited articles)	17	24	91
93	Denver University Law Review           (most cited articles)	17	23	113
94	Cardozo Arts & Entertainment Law Journal (most cited articles)	17	22	114
95	German Law Journal                        (most cited articles)	17	20	505
96	Business Lawyer                             (most cited articles)	16	28	73
97	Vanderbilt Journal of Transnational Law (most cited articles)	16	27	120
98	Cornell International Law Journal      (most cited articles)	16	25	143
99	Washington Law Review                   (most cited articles)	16	24	37
100	Brooklyn Law Review                       (most cited articles)	16	24	43
101	Columbia Journal of Law & the Arts         (most cited articles)	16	23	133
102	Florida State University Law Review   (most cited articles)	16	22	70
103	Chicago-Kent Law Review                     (most cited articles)	16	22	133
104	Michigan Journal of International Law (most cited articles)	16	21	94
105	Loyola of Los Angeles Law Review           (most cited articles)	16	21	121
106	South Carolina Law Review                     (most cited articles)	16	21	139
107	Tennessee Law Review                           (most cited articles)	16	19	118
108	Villanova Law Review                             (most cited articles)	16	19	159
109	Arizona State Law Journal                       (most cited articles)	15	29	103
110	Environmental Law                                 (most cited articles)	15	28	161
111	New York University Journal of International Law & Policy                       (most cited articles)	15	26	251
112	Maryland Law Review                             (most cited articles)	15	25	103
113	Nebraska Law Review                             (most cited articles)	15	24	121
114	Washburn Law Journal                           (most cited articles)	15	24	177
115	Family Law Quarterly                             (most cited articles)	15	23	255
116	Review of Litigation                               (most cited articles)	15	22	118
117	University of Pennsylvania Journal of International Law                                   (most cited articles)	15	22	152
118	Brooklyn Journal International Law           (most cited articles)	15	22	189
119	Vermont Law Review                             (most cited articles)	15	22	216
120	Virginia Tax Review                               (most cited articles)	15	21	197
121	Fordham J. of Corporate & Financial Law   (most cited articles)	15	21	250
122	William & Mary Bill of Rights Journal         (most cited articles)	15	20	87
123	Catholic University Law Review                 (most cited articles)	15	20	133
124	Marquette Law Review                           (most cited articles)	15	20	181
125	St. Louis Law Journal                             (most cited articles)	15	19	169
126	University of Cincinnati Law Review         (most cited articles)	14	22	59
127	Santa Clara Law Review                         (most cited articles)	14	22	145
128	Vanderbilt Journal of Entertainment & Technology Law                                     (most cited articles)	14	22	197
129	Indiana Law Review                               (most cited articles)	14	22	210
130	Michigan State Law Review                     (most cited articles)	14	21	44
131	Pennsylvania State Law Review               (most cited articles)	14	21	114
132	Loyola University of Chicago Law Journal (most cited articles)	14	21	251
133	New York University Environmental Law Journal                                               (most cited articles)	14	20	112
134	Columbia Journal of Gender and Law       (most cited articles)	14	20	126
135	St. John's Law Review                           (most cited articles)	14	20	153
136	Rutgers Law Review                               (most cited articles)	14	20	164
137	San Diego Law Review                           (most cited articles)	14	19	103
138	Washington University Journal of Law & Policy                                                   (most cited articles)	14	19	181
139	Fordham Intellectual Property, Media & Entertainment Law Journal                     (most cited articles)	14	18	124
140	University of Miami Law Review               (most cited articles)	14	18	138
141	Georgetown Immigration Law Journal       (most cited articles)	14	18	255
142	Drake Law Review                                 (most cited articles)	14	17	193
143	Howard Law Journal                               (most cited articles)	14	16	205
144	Texas International Law Journal             (most cited articles)	14	16	222
145	Constitutional Commentary                   (most cited articles)	13	31	108
146	Georgetown Journal of International Law   (most cited articles)	13	28	197
147	Minnesota Journal of Law, Science & Technology                                           (most cited articles)	13	24	133
148	Cornell Journal of Law & Public Policy       (most cited articles)	13	22	84
149	Albany Law Review                                 (most cited articles)	13	22	114
150	Seattle University Law Review                 (most cited articles)	13	22	148
151	Mercer Law Review                                 (most cited articles)	13	22	318
152	Stanford Law & Policy Review                   (most cited articles)	13	21	97
153	West Virginia Law Review                       (most cited articles)	13	21	228
154	Wisconsin International Law Journal         (most cited articles)	13	21	308
155	Seton Hall Law Review                           (most cited articles)	13	20	126
156	New York University Review of Law & Social Change                                               (most cited articles)	13	20	155
157	John Marshall Review of Intellectual Property Law                                         (most cited articles)	13	20	275
158	Temple Law Review                               (most cited articles)	13	19	126
159	Oregon Law Review                               (most cited articles)	13	19	177
160	American University International Law Review                                                 (most cited articles)	13	19	228
161	University of Toledo Law Review             (most cited articles)	13	19	233
162	Theoretical Inquiries in Law                   (most cited articles)	13	18	189
163	William & Mary Environmental L. & Pol. Rev.                                                 (most cited articles)	13	18	269
164	Syracuse Law Review                             (most cited articles)	13	18	289
165	Georgia State University Law Review         (most cited articles)	13	18	318
166	Albany Law Journal of Science & Technology                                           (most cited articles)	13	17	222
167	New York Law School Law Review             (most cited articles)	13	15	173
168	University of Pittsburgh Law Review         (most cited articles)	12	22	167
169	William Mitchell Law Review                     (most cited articles)	12	20	240
170	Hastings Constitutional Law Quarterly       (most cited articles)	12	19	161
171	Rutgers Law Journal                               (most cited articles)	12	19	220
172	Georgetown Int't Environmental L.Rev.     (most cited articles)	12	19	292
173	Vermont Journal of Environmental Law     (most cited articles)	12	19	321
174	Texas Tech Law Review                         (most cited articles)	12	18	318
175	Kentucky Law Journal                             (most cited articles)	12	17	169
176	William & Mary Journal of Women & Law   (most cited articles)	12	17	245
177	Louisiana Law Review                             (most cited articles)	12	16	185
178	Pace Law Review                                   (most cited articles)	12	16	187
179	Valparaiso University Law Review             (most cited articles)	12	16	197
180	Mississippi Law Journal                           (most cited articles)	12	16	251
181	Case Western Reserve Journal of International Law                                   (most cited articles)	12	16	304
182	University of St. Thomas Law Journal       (most cited articles)	12	16	365
183	Ohio Northern University Law Review       (most cited articles)	12	16	382
184	Creighton Law Review                           (most cited articles)	12	15	210
185	Suffolk University Law Review                 (most cited articles)	12	15	220
186	Pace Environmental Law Review               (most cited articles)	12	15	272
187	McGeorge Law Review                             (most cited articles)	12	15	325
188	Arkansas Law Review                             (most cited articles)	12	15	413
189	UMKC Law Review                                 (most cited articles)	12	14	193
190	Tulsa Law Review                                   (most cited articles)	12	14	272
191	American University Journal of Gender, Social Policy & the Law                           (most cited articles)	11	22	396
192	New York University Annual Survey of American Law                                       (most cited articles)	11	21	173
193	University of Pennsylvania Journal of Business Law                                       (most cited articles)	11	20	155
194	Widener Law Journal                             (most cited articles)	11	19	289
195	Southwestern Law Review                       (most cited articles)	11	18	240
196	Georgetown Journal of Poverty Law & Policy                                                   (most cited articles)	11	16	321
197	Temple Political & Civil Rights Law Review (most cited articles)	11	14	255
198	Georgia Journal of Law & Public Policy       (most cited articles)	10	18	420
199	Western New England Law Review           (most cited articles)	10	17	382
200	Southern Illinois University Law Journal   (most cited articles)	10	16	400
201	Baylor Law Review                                 (most cited articles)	10	15	236
202	Cleveland State Law Review                   (most cited articles)	10	14	177
203	Maine Law Review                                 (most cited articles)	10	14	255
204	New Criminal Law Review                       (most cited articles)	10	14	269
205	Denver Journal of International Law & Policy                                                   (most cited articles)	10	14	365
206	Duke Law & Technology Review               (most cited articles)	10	13	167
207	John Marshall Law Review                       (most cited articles)	10	13	300
208	Notre Dame J. of Law, Ethics & Public Pol. (most cited articles)	10	13	341
209	Suffolk Transnational Law Review           (most cited articles)	10	13	458
210	Case Western Reserve Law Review         (most cited articles)	10	12	164
211	Oklahoma Law Review                           (most cited articles)	10	12	308
212	Hamline Law Review                               (most cited articles)	10	12	390
213	North Dakota Law Review                       (most cited articles)	10	12	467
214	Marquette Sports Law Review                 (most cited articles)	10	12	581
215	Northwestern University Law Review Colloquy                                               (most cited articles)	10	11	158
216	Drake Journal of Agricultural Law             (most cited articles)	10	10	505

 

The Nevada Nuisance?

Keith Bishop at the California Corporate & Securities Law blog has put together a post profiling recent scholarship on Nevada corporate law. The articles and essays linked there show a variety of opinions about Nevada's recent rise to more prominence in corporate law.

The rise has been dramatic, especially for SEC reporting companies. Several months ago I used computer analysis of the SEC's EDGAR database to document the recent meteoric increase in the number of Nevada reporting ompanies. The post showed that Nevada has greatly outstripped Delaware in new SEC reporting companies in the last five years.

The news from Nevada is actually somewhat unsettling when one digs deeper into the data, as the majority of these Nevada public companies have at least one investor red flag. It turns out that most of these companies are (at least) one of the following: shell companies, blank check companies, reverse merger companies, development stage companies, or penny stocks--not exactly traits that exude legitimacy.

Indeed, one might wonder whether Nevada is a sort of "attractive nuisance" for investors. Of course, there are legitimate public companies incorporated in Nevada, but the data on the these "sideshow" companies is compelling. Why are so many of these "unconventional" companies incorporating in Nevada?

Startup Financing Report 2013-02-18

 

Startup Financing Report

2013-02-18

( for the Week of 2013-02-11 to 2013-02-17 )

The Startup Financing Report is published each Monday on WITNESSETH: Law, Deals, & Data. This Report tracks startup-company financing activity reported during the prior week. The data is based on Form D disclosures filed with the Securities and Exchange Commission. The individual deals underlying the data can be accessed here for new companies, here for all companies, and here for venture capital funds. The numbers in this beta version of the report are preliminary and subject to later update.

Weekly Synopsis:

Capital raising was up for the past week compared to the week before and the same week last year. Capital raising by startup companies YTD is now close to the same level last yar. Venture fund capital raising YTD was up compared to the same time last year but flattening out. Venture financing was led by Northgate Venture Partners VI, which raised $153 million.

All Operating Companies Raising Money
	Weekly	% Change from Week Before	% Change from Same Period Last Year	Year to Date Total
Number of Deals	216	45 %	12.5 %	1,284
Total Offering Amount	$ 956,974,597	77.3 %	-9.1 %	$ 6,169,736,836
Total Amount Sold	$ 706,823,343	157.5 %	34.01 %	$ 4,760,595,860
Total Number of Investors	1,794	-10.7 %	30.8 %	14,011
* Total Offering Amount is the total size of the offering. Total Amount Sold is the amount of the offering that had been sold as of the report date.

 

New Operating Companies** Raising Money
	Weekly	% Change from Week Before	% Change from Same Period Last Year	Year to Date Total
Number of Deals	126	59.5 %	23.5 %	739
Total Offering Amount	$ 713,999,650	71.6 %	18.2 %	$ 4,423,385,014
Total Amount Sold	$ 418,148,642	120.9 %	46.32 %	$ 2,952,429,657
Total Number of Investors	1,160	39.9 %	69.6 %	7,841
* Total Offering Amount is the total size of the offering. Total Amount Sold is the amount of the offering that had been sold as of the report date. ** New Operating Companies are those that have not previously filed any SEC documents.

 

Venture Capital Funds Raising Money
	Weekly	% Change from Week Before	% Change from Same Period Last Year	Year to Date Total
Number of Financings	11	0 %	175 %	61
Total Offering Amount	$ 298,975,000	57.2 %	85.5 %	$ 7,783,288,370
Total Amount Sold	$ 287,712,000	270.8 %	450.28 %	$ 6,168,593,094
Total Number of Investors	186	215.3 %	644 %	969
* Total Offering Amount is the total size of the offering. Total Amount Sold is the amount of the offering that had been sold as of the report date.

 

Legal Structure of Operating Companies
	New Operating Companies		All Operating Companies
	2012 Totals	2013 Year to Date	2012 Totals	2013 Year to Date
Corporation	38.6 %	36.3 %	51 %	47.6 %
Limited Liability Company	49.5 %	51.2 %	38.7 %	40.9 %

 

Archived Startup Financing Reports
2013-02-18	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-02-11	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-02-04	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-28	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-21	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-14	Startup Financing Report	All Companies	New Companies	Venture Funds
2013-01-07	Startup Financing Report	All Companies	New Companies	Venture Funds

 

Notes: For information about the methodology used in this report, see here. For answers to frequently asked questions about this report, see here.

Merger Agreement Promises to Oneself

Last week saw the blockbuster $28 billion acquisition of H.J. Heinz by Berkshire Hathaway and 3G Capital. The merger agreement, filed on Friday, provides a revealing glimpse into the issues that corporate managers think are important in acquisitions and, not surprisingly, many of those issues are unrelated to securing the best value for public shareholders of the target.

In particular, the merger agremeent contains a bevy of promises about various social issues related to Heinz, including a "Company Heritage" clause that provides:

"Preservation of Company Heritage. From and after the Closing, Parent shall cause the Surviving Corporation to preserve the Company’s heritage and continue to support philanthropic and charitable causes in Pittsburgh and other communities in which the Company operates, including honoring the charitable commitments set forth on Section 7.15(c) of the Company Disclosure Letter, in each case in a manner and amount consistent with past practice."

The clause appears to have been copied almost word-for-word from the merger agreement from the 2008 acquisition of Anheuser-Busch, with St. Louis simply crossed out and Pittsburgh written in, along with a few minor changes. The Anheuser-Busch deal was an even bigger bonanza of social issues, in which the agreement (among other things) required the acquirer to "reaffirm" its "commitment" to the the "three-tier distribution system" for alcohol. Why the Anheuser-Busch shareholders (who were being cashed out) should have cared whether the acquiring company pledged allegiance to a paternalistic, anti-competitive relic from the Prohibition era is a mystery to me, but apparently the pledge was important to management.

In the Heinz deal, the acquirer was not required to swear its eternal devotion to Prohibition-era policies, but did agree to maintain the Heinz name, to continue charitable and philanthropic activities, and to keep the headquarters in Pittsburgh (forever?) Indeed, the "Chairman, President, and Chief Executive Officer" (all the same person)  reportedly said he told the acquirers at the outset that "Pittsburgh was nonnegotiable." Although I'm sure that negotiating stance was appreciated in Pittsburgh, it might lead Heinz shareholders to wonder what considerations were paramount in the boardroom. So no matter how much money an acquirer offered to move away from Pittsburgh or change the name of the company, the CEO would simply not entertain any such proposal? Perhaps that is the case; indeed the absence of a "go-shop" provision and other factors lead some experts to wonder whether Heinz managment consciously limited its options, possibly failing to get the best price for the public shareholders (e.g., you and me).

It turns out, however, that these clauses may not really constrain the acquirer much, and therefore may not have required the shareholders of Heinz to give up much. It appears that the social clauses in the agreement are merely textual embroidery with no real legal consequences, and therefore no consequences for the financial markets. This is because even if an agreement to preserve "company heritage" were not too vague and indefinite to enforce in court, who is supposed to enforce it after closing? The survival clause in Section 10.01 carefully specifies that post-closing covenants (such as this one) remain in effect after closing. But the only parties to the agreement are the merging companies, and after the merger Heinz will be a wholly owned subsidiary of the acquirer. It seems unlikely the acquirer will cause its subsidiary Heinz to bring a lawsuit against the acquirer for betraying the "company heritage" after the closing.

As for third-party beneficiaries who might be able to enforce the provision, Section 10.09 makes it clear there are none who could protect the "company heritage." One might think this was just an overlooked provision near the end of the agreement, but of course the managers did not forget to make themselves third-party beneficiaries of the indemnification provisions in that provision. Perhaps more telling is that there is no time limit to the obligation, suggesting the acquirer didn't think it would really be constrained by the promise. It is unlikely the acquirer would agree to maintain the corporate headquarters in Pittsburgh into eternity unless it had serious doubts about whether the clause was actually enforceable. It seems that the parties deliberately wrote an unenforceable provision into the agreement, perhaps to try to avoid agitating local politicians or other interests.

In a sense, then, the parties here have used the merger agreement to make a series of unenforceable promises to and by themselves, and with no shareholder-oriented purpose. The shareholders of Heinz are being cashed out--they have no continuing interest in this company--so management cannot purport to be preserving shareholders' interests by negotiating this clause. How does this provision help the shareholders of Heinz, who presumably are giving up some amount of extra cash consideration in order to promise to keep the company headquarters in Pittsburgh and to preserve the "company heritage"? Or perhaps the shareholders aren't giving anything up because the acquirer would have honored this "heritage" anyway, making the promise doubly unnecessary. It seems likely that both parties knew this is a unenforceable clause. So why make such a promise if it cannot realistically be enforced?

One seems compelled to conclude that this was just aesthetic embellishment, designed to mollify the various constituencies in the corporation that otherwise go berserk when a company comes under new ownership. Why else would Heinz management demand a promise from the acquirer to the acquirer's subsidiary after the merger to preserve "company heritage" and Pittsburgh offices? If I were a shareholder of Heinz, I might ask why management would make a "nonnegotiable" social demand that, if anything, harms the value to be received by Heinz shareholders in the merger. If I were an employee or other non-shareholder who has an interest in Heinz, I might ask why managers didn't write in a mechanism to make the social clauses enforceable, as did Ben & Jerry's in its merger agreement. The Heinz clause, lacking a realistic enforcement mechanism, has the potential to lull the non-shareholder constituencies into a false sense of security so they won't oppose the acquisition. 

Of course, the board is not likely to face any serious legal challenge from the decision to simultaneously prioritize issues other than shareholder value and potentially mislead the other supposed beneficiaries of the social issues provisions. Heinz is incorporated in Pennsylvania, and as Professor Guhan Subramanian has documented, Pennsylvania (along with Ohio and Massachusetts) has among the most "overreaching" anti-shareholder, pro-manager laws in the country. As for the other constituencies, Pennsylvania has not gone so far (yet) as to imply a fiduciary duty to them, so management will not have any liability for negotiating a clause with no enforcement mechanism. Thus, the promises of this agreement are basically just promises to oneself, a corporate form of "New Year's resolution," with perhaps the same dubious staying power.