Bridge Financing Documents

One of the sets of documents that we have automated at AlphaTech Counsel is the bridge financing documents for an emerging company. Attached is a sample of the documents.

One of the sets of documents that we automated at AlphaTech is the bridge financing documents for an emerging company. Attached is a sample of the documents: Convertible Note and Subscription Agreement

Instead of just using form documents as most law firms do, robust automation allows us to deliver common document sets for emerging companies in a more efficient manner. So what else does “robust automation” yield? It improves document accuracy, provides a valuable knowledgebase from which to draw, and enables us to deliver common document sets to our clients quickly. It also frees up time of our lawyers to enable them to spend less time on basic contract drafting and more time on activities that afford our clients higher value. Continue reading →

Preparing Board Meeting Minutes: Necessary Evil and Corporate Drudgery?

For many entrepreneurs, the idea of preparing minutes of board meetings seems like a thankless chore, especially when there are only two or three directors. It may be tempting to skip this corporate formality if the purposes for it are not understood. Also, many entrepreneurs wonder what magic language should go in them to make them “legal.” This article clarifies the reasons for preparing minutes and identifies the components that should be included in them.

Reasons for Preparing Board Meeting Minutes

There are several reasons for preparing good corporate minutes:

State Law Requirements and Corporate Bylaws. State laws generally require corporations to prepare and keep minutes of board meetings. According to Delaware state law (a state where many companies are incorporated), “one of the officers shall have the duty to record the proceedings of the meetings of the stockholders and directors in a book to be kept for that purpose.” The Wisconsin Statutes do not require corporations to take board minutes unless requested by a director, but most corporation bylaws require the corporation to maintain adequate minutes of board meetings.
Reduce Personal Liability Exposure. Preparing and maintaining proper corporate minutes may help reduce the risk of personal liability. Directors have a fiduciary duty of care, meaning that they have to show that they sufficiently analyzed the alternatives before making a decision. They also have a fiduciary duty of loyalty, meaning that they must act in the best interest of the corporation and its shareholders, above any of his or her own interests. Maintaining good corporate minutes can help to establish that the duties of care and loyalty have been fulfilled. Also, by having good corporate records, there may be less chance of a third party “piercing the corporate veil” by claiming that the corporation is nothing more than a sham of the owners who disregard the separateness of the entity and should not receive the benefits of limited liability protection.
Third Party Requirements. Another reason to keep minutes is to provide evidence of approval of transactions involving third parties (e.g., banks, investors, and strategic partners). In addition to being a state or bylaws requirement to approve significant transactions, some third parties require evidence of such approval as a condition of closing.
Reduce Likelihood of Certain Types of Litigation. In a 2006 case, the Supreme Court of Delaware described best practices for approval of an action by a board committee and concluded that the company could have avoided decade-long litigation if proper minutes had been recorded for every meeting with detail regarding the information that was used to make the decisions.
Creation of a Historical Record. A bonus of preparing minutes is that the company will accumulate a searchable, historical record of all of the significant actions taken by the company. By either gathering signatures electronically or by scanning and combining the final, signed minutes into a searchable PDF binder, they will be easily searchable and ready for delivery to future investors, bankers, and auditors who require them for a transaction or audit.

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Paper Stock Certificates: A Thing of the Past?

As public companies are increasingly opting out of providing paper certificates to shareholders in favor of providing electronic registration, most private companies and their shareholders have yet to follow suit. Issuing uncertificated shares is allowed under most states’ laws, and, as many on the public company side can attest, numerous cost and time efficiencies can be gained by going paperless with shares.

As public companies are increasingly opting out of providing paper certificates to shareholders in favor of providing electronic registration (a movement known as “dematerialization”), most private companies and their shareholders have yet to follow suit. Issuing uncertificated shares is allowed under most states’ laws, and, as many on the public company side can attest, numerous cost and time efficiencies can be gained by going paperless with shares. As we accept electronic statements to represent our public company holdings and exhibits to Operating Agreements to note our LLC ownership interests, do we really still need as evidence of our private company ownership a hokey, bordered piece of paper with an eagle on it?

Disadvantages of Issuing Paper Stock Certificates

Consider the inefficiency and chances for errors in the typical cumbersome process to issue paper stock certificates: Continue reading →

Wide Adoption of Electronic Signatures and Electronic Contracts Overdue

Many laws establish the validity of electronic signatures, but adoption has been mainly in e-commerce. With heightened awareness of the efficiency and security of current e-signature software spurred by Adobe’s recent free beta release of its eSignatures product, electronic contracts may become more popular.

While almost a decade has passed since the federal Electronic Signatures in Global and National Commerce Act (ESIGN Act) became law, most companies have yet to take advantage of the opportunities that the act affords. Other than online click-wrap license agreements and Internet sales terms and conditions, most companies are still entering into most of their agreements on paper. Having moved beyond faxing in most cases, the norm these days for most businesses is to print, sign, scan, and email the contract. In large or important agreements, companies typically also exchange multiple sets of originals, so that each side (and their legal counsel) have original copies. In most situations, this elaborate process is unnecessary. For a variety of reasons, we often encourage clients to go paperless with their contracts when appropriate.

Software and Internet Services that Assist with Electronic Contracts

There is some encouraging news that going paperless in the contracting process may become more prevalent. Adobe recently released a free beta version of its online eSignatures software-as-a-service (SaaS). The SaaS offering is easy to use and may spur more adoption of e-signature technology. Low cost competitive products from DocuSign, Arx, and AlphaTrust are also worthy of consideration. These and other e-signature vendor products offer the following benefits:

E-signatures speed up the contracting process. The extra steps of printing for signature, scanning, preparing a cover letter/fax, and mailing/faxing are removed.
E-signature service can be accessed virtually anywhere. All that the parties need is a computer with an Internet connection. No need for the traveling executive to find a printer and scanner/fax or have the hotel staff print the document, prepare a coversheet and fax the signed document back.
Electronic contracting saves paper. There is no need to print the agreement, so it supports the virtually paperless office, such as ours.

In addition, traditional concerns over security have mostly been allayed. The e-signature vendors typically offer one or more security measures to authenticate the sender and verify that the document has not changed since it was signed. Many e-signature vendor offerings are SAS 70 Type II compliant and upload and download over an SSL encrypted channel. Audit trails show when and by whom documents were sent, viewed, and signed. After signing and downloading, with most of the products, the party sending the contract typically has the ability to delete the electronic contract from the cloud.

Laws Related to Electronic Contracts

Numerous laws in the United States and abroad recognize the legitimacy of electronic signatures. The federal ESIGN Act and Uniform Electronic Transactions Act (UETA) serve to establish generally the legal equivalence of electronic records and signatures with paper writings and manually-signed signatures, removing barriers to electronic commerce. Forty-seven states have adopted the UETA, a model law for states to enact to cover contracts governed by state law; the remaining states, New York, Illinois, and Washington, have each adopted their own statutes governing electronic transactions. Under the UETA, an electronic signature is attributable to a person if it was the act of the person, which can be shown by the effectiveness of the security procedures for signature authentication and the context and surrounding circumstances at the time of the document’s creation. No one can be required to use a digital signature or to accept a digital signature. Besides the United States, the European Union has adopted the Electronic Signature Directive (1999/93/EC) and numerous countries have adopted electronic signature laws.

How Electronic Signatures Work

These are the basic steps to send a document for signature using an electronic signature solution. The initiator sets up a password-protected account, uploads a document, types the email addresses of the recipients, composes a short cover note (if desired), clicks to sign (or chooses to sign last), and sends. Recipients receive an email with the customized message and a link to a document to sign. Recipients are not required to pay to use the electronic signature service, but they may need to set up an account. After completing any required authentication checks, they click on the link, review the document, and click to sign and send. After the document is fully signed, all parties receive an email with a link to the document with digital signature stamps from each signing party. In the case of Adobe’s eSignatures SaaS offering, Adobe will apply a certifying signature, appearing as a blue ribbon, indicating that the document has not changed since it was signed.

Additional E-Signature-Based Offerings that Facilitate the Electronic Contracting Process

E-signature vendors with low-cost software or services offer many of the following additional features (some of which Adobe may incorporate into later versions):

Signatures in multiple places and on specific lines (whereas Adobe’s eSignatures SaaS offering just appends a signature page to the end with all the electronic signatures)
Fill-in-the-blank forms and agreements, guiding receiving parties through the document with signature flags, initial flags, and instructions, and preventing a party from signing a document with an incomplete blank
Ability to compare the signed document to the encrypted hash captured at document signing to confirm that the signature is valid and the document has not been modified (whereas Adobe’s blue ribbon indication is immediate)
Signing parties other than the sender do not need to subscribe to the service (free)
Folders to deliver multiple documents in logical groups
Workflow processes for internal approvals
Access via mobile devices
Optional multi-layered authentication, such as passwords, ID checks administered by third parties with questions from public and private databases, security fobs, etc.
Integration with business enterprise software
Server-based as well as hosted solutions
Custom branding and instructions
Optional behind-the-scenes digital signature cryptology

Using Digital Signatures for Additional Security

A subset of electronic signatures, digital signatures provide more checks to ensure security, but more time and cost can be involved in administering them. Digital signature technology can also be used to control who has access to a document or who can sign or certify it. Digital signature technology is the gold standard of security in terms of validating the authenticity of the signature and preserving the integrity of the document. This is due to the secure method of locking and unlocking the signatures on the document. A digital signature, also known as a digital ID, requires a private key of the signer and a public key for the receiving party to validate the signature. Many large organizations implement a public key infrastructure to issue, authenticate, and revoke digital IDs used for digitally signing documents. Most receiving parties require that a certificate authority, such as VeriSign or GlobalSign, validate the authenticity of the public key. There are fees in the hundreds to thousands associated with using a Certificate Authority. While it is not difficult to establish a digital ID or validate another party’s digital IDs, some education and administration is involved.

When to Use Handwritten Signatures vs. Electronic Signatures on Contracts

Although electronic signatures are in most cases recognized as being equally valid as handwritten signatures, there are occasions when handwritten signatures may be more appropriate. When doing a substantial deal with a party in a more formalistic country, such as Japan, China, Spain, and Italy, a personal signing ceremony can be a culturally sensitive choice. Parties might also prefer to sign in person or exchange wet ink signatures when stakes are high or emotions run deep, as with the sale of a business. In addition, under law, there are certain types of agreements that cannot validly be signed electronically. For example, in many places, wills, testamentary trusts, family law documents, and U.C.C. documents must be signed by hand. If in doubt as to whether a contract may validly be signed electronically, check with your attorney first. Also, government regulators in some highly regulated industries such as pharmaceutical and financial services regard the use of digital signature technology favorably for regulatory and legal compliance.

Just as signing and emailing documents became prevalent with widespread adoption of PDF files and improvements in scanners, so, too, are electronic signatures likely to become more mainstream as people discover the increasing efficiency and security of e-signature technology.

The NDA, CDA, PIA, and Other Confidentiality Agreements

Sometimes they are called Nondisclosure Agreements (NDAs), Confidential Disclosure Agreements (CDAs), Proprietary Information Agreements (PIAs) or Secrecy Agreements, but for the most part, they each are the same thing trying to accomplish virtually the same objective: limit the disclosure and use of one’s confidential information. This post examines the details of an NDA.

Contracts, Forms, Reference, Start-ups
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Because of the frequency of which they are used, one of the first forms that we automated at AlphaTech was the Confidentiality Agreement. Sometimes they are called Nondisclosure Agreements (NDAs), Confidential Disclosure Agreements (CDAs), Proprietary Information Agreements (PIAs) or Secrecy Agreements, but for the most part, they each are the same thing trying to accomplish virtually the same objective: limit the disclosure and use of one’s confidential information.

So, if they are all trying to do the same thing, why are there so many forms out there? The answer is that it often comes down to legal limitations, the one-way versus two-way (or mutual) nature of the agreement, and exceptions or limitations to the disclosure and use limitations. For example, many states consider when employees sign a Confidentiality Agreement it is a restrictive covenant (or noncompete). As such, to be enforceable in most states, the agreement must have “reasonable” limitations on variables such as duration. These legal restrictions are not typically the same for two businesses entering into an NDA.

The balance of this post examines the details of an NDA.

Definition of Confidential Information

Most NDAs define “Confidential Information” very broadly. There are commonly carve-outs for things like information that ends up in the public domain, information already in the possession of the recipient, and information conveyed to the recipient from someone else who was not under an obligation to keep it confidential. It is also common to see trade secrets carved out of the confidential information definition if the NDA imposes more strict obligations on use and disclosure of trade secrets. Sometimes one sees a carve-out for information that is “independently developed” by the recipient without the use or benefit of the confidential information provided by the discloser. This last carve-out is appropriate in some contexts, but not in others. Regardless, if the “independently developed” provision is incorporated, be sure that it does not permit “reverse engineering” of confidential information.

A controversial provision that one sometimes sees in NDAs is a requirement that in order to be considered within the definition of confidential information, the information must be marked “confidential” or confirmed in writing as confidential if communicated orally. This limitation is fine for arrangements that are very limited in scope and have a specific set of documents that are considered confidential. However, companies should be wary of such a limitation for continuing relationships or arrangements in which many people are exchanging a lot of confidential information. The process of marking and communicating what is confidential (consistently) can get unwieldy very quickly. A failure to follow just once this “simple” procedure of marking something confidential, can lead to disastrous results.

Use and Disclosure of Confidential Information

An important but sometimes overlooked provision is the scope of the permitted use of confidential information. The scope of use should be broad enough to accomplish the intended purpose of the disclosure (e.g., to enable the consultant to perform under a consulting agreement or explore the possibility of entering into a strategic partnership with another company), but not overly broad to enable shenanigans. The use provision should be tailored to the specific context of the intended use. Also, it is common to see a provision that enables disclosure if the recipient is legally compelled to do so (e.g., under a court order or subpoena).

No License or Warranty

It is common to have a provision in an NDA that disclaims any license or warranty being conveyed when delivering the confidential information. Sometimes, when something is delivered, there can be an implied warranty or license associated with the item being delivered (that the information is accurate, that it works, that it doesn’t infringe on the rights of others, that the recipient can use it, etc.). This type of provision typically disclaims those.

Duration of the NDA

NDAs typically have two elements of duration. The first element is the period during which disclosures can be made that are covered under the NDA. For example, for employees or consultants, this is typically the period during which the employee or consultant is engaged by the company. The second element is the period during which confidentiality and use restrictions apply after the agreement comes to an end. A common restriction one sees for employees is that the duration lasts for a period of two years following the end of the employment.

Governing Law, Jurisdiction, Forum/Venue

Most NDAs address which state’s (or country’s) law applies when interpreting the NDA. Many NDAs also address where a dispute will be resolved. The provision is less important when the two parties are located in the same area. It becomes more important (and often negotiated) when the parties are not located near one another or are located in different countries. Common compromises are to (i) choose one party’s state’s law (or country’s law) to govern the contract and the other party’s location as the forum/venue, (ii) delete the provision altogether, making it unclear which state’s law applies and where disputes are to be settled, or (iii) in a two-way NDA, choose a neutral but relevant state’s law to govern the agreement (e.g., Delaware, if both companies are incorporated there) and require the discloser (the company enforcing) to use the recipient’s location in the event the discloser would like to sue the recipient.

Right to Equitable Remedy

Many NDAs will include a provision that states if the recipient breaches the agreement, the discloser will be entitled to equitable or injunctive relief. In the NDA context, equitable or injunctive relief refers to getting a court order to stop the recipient from using or disclosing the confidential information. Sometimes, this type of relief can be more difficult to obtain than monetary damages. However, in most contexts involving an NDA dispute, the discloser’s top priority is to prevent the recipient from continuing to use or disclose the confidential information. As a result, the purpose of the provision is to attempt to stipulate that the requirements to get an equitable or injunctive remedy have been met.

Entitlement to Attorneys Fees in the NDA

Many NDAs contain a provision covering attorneys’ fees. Sometimes they are structured as a prevailing party obligation—the winner gets the loser to pay the winner’s attorneys’ fees. Other times, especially in one-way NDAs, the attorneys’ fees provision requires the recipient to pay the discloser’s attorneys’ fees in enforcing the terms of the NDA.

Return of Confidential Information and Materials

Most NDAs address the situation of what happens at the end of the term of the NDA with regard to materials that contain confidential information. Most NDAs require that materials containing confidential information either be returned or destroyed. Some NDAs require that if the recipient destroys the materials, the recipient is required to certify that the materials have been destroyed.

Sometimes NDAs contain a provision that entitle the recipient to retain a copy of all confidential information for record keeping purposes. Query whether maintaining a single copy for recordkeeping purposes on a server that everyone has access to is consistent with the expectations of most companies disclosing confidential information. If retaining a copy for recordkeeping purposes is included, be sure that type of issue is addressed. Similarly, sometimes the NDA will contain a provision that enables people within the recipient organization to retain the “residual” information in their memory. Of course, regardless of the presence of this particular provision, people cannot readily “delete or destroy” information in their mind without collateral grave implications. However, be sure to understand what people can do with that residual confidential information under the terms of the agreement.

Other Provisions in the NDA

Depending on the industry or substance of the disclosure, there can be additional provisions included within the NDA. For example, there can be some export limitations for certain types of information. The NDA can address those limitations. The NDA can also cover certain disclosures and limitations that are applicable to insider trading restrictions under federal securities laws. These and other issues should be considered when developing an organization’s NDA forms and when reviewing those received from another company.