TECH EXITS: GETTING REWARDED FOR YOUR BLOOD, SWEAT AND TEARS

Transcription

1 TECH EXITS: GETTING REWARDED FOR YOUR BLOOD, SWEAT AND TEARS Paul Chen, Head of Corporate Asia, DLA Piper Andy Tam, Associate, DLA Piper 15 December 2015

2 Strategic Options (not exhaustive list) IPO M&A Licensing Valuation IPO Multiples M&A Multiples N/A Liquidity Gradual Immediate Gradual Cost: Time Money High High Moderate High Low - Moderate Low Upside Potential/ Downside Risk Liabilities Significant Limited Moderate to Significant Securities law Shareholder derivative suits Indemnification Shareholder derivative suits Breach of License TECHLAW Hong Kong

3 Global Tech Exit Activities TECHLAW Hong Kong

4 Recent Tech IPOs Exchange & Proceeds NASDAQ; US$ 685 million New York; US$ 841 million NASDAQ; US$ 1.8 billion NASDAQ; US$ 306 million New York; US$ 460 million New York; US$ 245 million Hong Kong; US$ 207 million New York; US$ 201 million Hong Kong; US$ 196 million TECHLAW Hong Kong

5 Sample Tech Exits TECHLAW Hong Kong Source: Crain s NY Business, February 17, 2015

6 Sequence of Events VC and/or entrepreneur choose between going public or selling the firm to an acquirer Time 0 Time 1 Time 2 Product market competition takes place Cash flows are realized Valuation expectations increase Exit decision TECHLAW Hong Kong

7 IPO Strategic Considerations Preparation of financial statements Public disclosure and ongoing compliance matters Market windows Impact of share performance post-ipo M&A Identifying Buyers Negotiation leverage True exit? Seller indemnification and lack of liquidity for shares/options Impact of busted deal Concurrent Exit Tracks and Timing Versus Key Business Milestones Cornerstone Pre-IPO investors Impact on company resources, morale and stakeholder expectations TECHLAW Hong Kong

8 Timing & Logistics IPO (US example) IPO process can vary in timeframe, usually 4-6 months Sample timeline: TECHLAW Hong Kong

9 Timing & Logistics M&A Timeline Inherently Less Structured than IPO Preparation Time Sale Process 4-6 weeks VDR set up; Seller's draft agreements; bidding procedures; teaser Dual-Track Piggyback on IPO work Negotiation Weeks to months Consummation Days to Months, Drivers include: Due Diligence / Regulatory Issues Stockholder Approval Requirements Cash deals Stock deals Key consents, etc. Generally conducive to overlap or parallel tracking with IPO TECHLAW Hong Kong

10 Listing Requirements (Selected) Audited track record Finance Accounting standards Number of investors Main Board Hong Kong GEM 3 years of audited accounts 2 years of audited accounts Profit test: Profit for the most recent year: HK$20 million Aggregate profit for 2 preceding years: HK$ 30 million Market cap: HK$200 million Market Cap/ Revenue/ Cashflow test: Market cap: HK$ 2 billion Revenue for the most recent year: HK$500 million Cashflow for 3 preceding years: HK$100 million Market Cap/ Revenue test: Market cap: HK$ 4 billion Revenue for the most recent year: HK$500 million Hong Kong FRS or IFRS Cashflow for 2 preceding years: HK$20 million Market cap at the time of listing: HK$100 million NASDAQ Capital Market (Equity Standard) Income N/A Minimum Publicly Held Shares 1 million shares Minimum Bid Price US$4/share NASDAQ Global Market (Equity Standard) 2 years of operating history Minimum Stockholders Equity US$5 million round lot shareholders Income N/A US GAAP or IFRS Minimum Publicly Held Shares 1.1 million shares Minimum Bid Price US$4/share Minimum Stockholders Equity US$30 million 400 round lot shareholders Public float HK$50 million HK$30 million US$15 million US$18 million TECHLAW Hong Kong

11 US SEC Review JOBs Act Allows "emerging growth companies" (companies with less than $1 billion in revenue) to make a confidential SEC submission. Foreign Private Issuers (FPIs) that are qualified as emerging growth companies are eligible to file as an EGC. An EGC must publicly file its initial confidential submission and all confidentially submitted amendments at least 21 days before marketing its "road show" Traditional FPI Public Offering vs. JOBs Act Offering FPIs that choose to use the traditional FPI registration statement procedures will not be able to avail themselves of any of the benefits available to EGCs under the JOBs Act TECHLAW Hong Kong

12 US SEC Review Key benefits available to EGCs under JOBs Act include: the ability to engage in pre-ipo marketing communications to determine potential interest in the IPO; the ability to confidentially submit a registration statement and any amendments to the SEC; the ability to include only two (instead of three) years of audited financial information (with only two years of MD&A comparisons) and only two (instead of five) years of selected financial data in the registration statement (under a separate SEC accommodation, first time foreign registrants that elect to prepare financial statements under U.S. GAAP may also provide two years of audited financial information and MD&A comparisons, but still need to present five years of selected financial data under home-country GAAP); the ability for underwriters to engage in pre-deal and expanded post-deal research on the company; and a delay for up to five years in complying with the requirement to provide an auditor s attestation under Section 404(b) of the Sarbanes-Oxley Act. TECHLAW Hong Kong

13 Backdoor Listing (Australia example) A backdoor listing or reverse takeover refers to a company becoming publically listed through being acquired by an existing listed company rather than seeking to list and apply for admission itself through an initial or front door listing. There has been a recent increase in the number of backdoor listings (or reverse takeovers) on the Australian Securities Exchange (ASX). Requirements: Shareholder approval of the listed company since: acquisition is likely to constitute a change in the nature or scale of the business activities; and re-compliance process often involves the issue of securities to the vendors. Prospectus or information memorandum with detailed information on the new business. The re-listed entity having a minimum net tangible assets of A$3 million. TECHLAW Hong Kong

14 Typical Flip Structures Post-Restructuring Pre-Restructuring Shareholder 1 Shareholder 2 New Investors Shareholder 1 Shareholder 2 US NewCo HK Corp Intercompany Relationship HK Corp TECHLAW Hong Kong

15 Benefits of Flip Structure Easier access to US investors (Angels, VC funds, Emerging growth funds) and US/Global markets Pitch Book Term Sheet Greater access to engineers and other tech employees Easier implementation of equity incentive plan (stock options) Potentially more options for the eventual exit TECHLAW Hong Kong

16 Scenario The subject company is a FinTech company which provides software to online marketplaces for P2P trading of financial assets. It has been a success so far, and is currently in its third year of operation. The founders are considering options for exit : IPO in Hong Kong / the US; or Inviting strategic investors to invest in the company (and buy out some of his shares). The founders do not want to sell 100% of the company. TECHLAW Hong Kong

17 Parties Buyer B* Founders Andy and Amy Company A&A Holdings A large insurance company with headquarters in Nebraska Looking for opportunities to sell complex financial products through online exchanges Andy Once a frustrated corporate lawyer CEO and COO Amy Software engineer Brains behind the technology Proposed Valuation: $50 million 25 employees 3 major customers Respectable revenues but no profits (yet) One potential strategic partner wanting to acquire A&A s IP through a licensing arrangement TECHLAW Hong Kong

18 Major Considerations Deal Structure Deal Certainty Management Incentives TECHLAW Hong Kong

19 Negotiations Deal Certainty Accuracy of Representations Each of the IP representations and warranties made by the Founders shall have been accurate in all material respects as of the date of this Agreement and shall be accurate in all material respects as of the Closing Date as if made on and as of the Closing Date. Drop Dead Date Either party may terminate this Agreement if the Closing does not occur within one month after the signing (to allow parties to obtain material third party consents). TECHLAW Hong Kong

20 Sample IP Reps accurate and complete lists of target s registered IP title to target s IP validity and enforceability of target s IP in-bound licenses of third party IP out-bound licenses of target s IP no infringement (or alleged infringement) by target of third party IP; sufficiency of target s IP no infringement by third parties of target s IP no viruses or other defects in target s products use of open source software TECHLAW Hong Kong

21 Caveats This presentation is intended merely to provide a general introductory overview of certain legal matters relating to securities laws, M&A and other legal matters. This presentation is not intended to provide a complete analysis of the matters covered, but rather is intended to be used and referred to in conjunction with a more comprehensive oral presentation regarding those matters. Accordingly, there are potentially important exceptions and qualifications that are not reflected in this presentation. All names used in this presentation are fictional and any resemblance to any real names is a coincidence. All names and circumstances portrayed in this presentation are fictitious. No identification with actual persons, products or events is intended or should be inferred. This presentation is not intended to provide legal advice or to establish an attorney-client relationship. The following disclaimer is provided in accordance with the United States Internal Revenue Service s Circular 230 (21 CFR Part 10): Any tax advice contained in this presentation is intended to be preliminary, for discussion purposes only and not final. Any such advice is not intended to be used for marketing, promoting or recommending any transaction or for the use of any person in connection with the preparation of any tax return. Accordingly, any such advice is not intended or written to be used, and it cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed on such person. TECHLAW Hong Kong