Tag Archive: business decisions

Keynote Address: Carlos Watson, Tales From a Silicon Valley Start Up

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Carlos Watson is coming off a good week. Last Monday, it was announced that Ozy, Watson’s news and culture website, received a $20 million investment from German media company Axel Springer. Ozy–which just turned one-year old–previously had raised a few million dollars.

Carlos Watson at NACD Annual Conference

Named after Percy Bysshe Shelly’s sonnet “Ozymandias,” Ozy is attempting to take the world of digital media by storm. With the hope of bridging the gap between seemingly disparate pieces of information, Watson has created an online news source aimed at the millennial generation. According to Watson, the goal was to “be the daily digital brief that could catch people up and vault them ahead.” During his keynote address to NACD’s 2014 Board Leadership Conference, Watson shared his views on this year’s theme–conducting business “beyond borders”–and his “lessons learned” from his start up, or as he put it: “The good, the bad, the ugly, and the really ugly.”  These lessons include:

  1. Design. Watson believes in the aesthetic hypothesis set by Apple, Nest Thermostats, Vogue magazine, and others: Design matters. According to Watson, good design is more than a “nice to have,” it is essential in the value proposition and is exemplified on Ozy’s site.
  1. Importance of good partners. A game-changer for Ozy was when “old media” companies realized that change was happening, and needed to partner with “new media.”
  1. How global the opportunity is. At its inception, Watson’s goal for Ozy was to have one million viewers at the end of its first year. Today, Ozy has five million viewers in one month–from around the world. “The interest from non-U.S. players is significant and exciting.”
  1. Not good, but great people. Watson interviewed 400 people to hire Ozy’s first 50 employees across all the continents. Hiring and retaining the very best employees is a challenge for both mature companies and young start ups.
  1. What it means to work hard. Watson’s mother told him: “I never want to hear that someone outworked my kids.” According to Watson: “In a world of Uber and Lyft, Square and Dropbox, start ups have become sexy. People miss how hard you have to work in order to make those companies come alive.” In fact, one of Watson’s greatest struggles is communicating to people that Ozy will not become Facebook overnight– it will take time.
  1. The Importance of Being Relentlessly Well-Organized. Mountain View, California–the location of Ozy’s headquarters–is the new capital of Silicon Valley. Surrounded by companies such as Google, LinkedIn, and Whatsapp, Watson is able to observe what creates success in start ups. For founders of young start ups it may not come easily, but being well-organized is a great differentiator in those who are successful.
  1. Supersize your dreams. Watson believes “every month, you have to think about how you are going to put yourself out of business.” By doing so at Ozy, it  ensures that the editorial work gets stronger every day, that the product gets better, that marketing improves.
  1. Importance of good “vibes” and chemistry. You hear so much about hard skills and talent, but would I actually enjoy being here with this person 5-6 days straight?” Watson encouraged companies to look for not just talent and skills, but also “good vibes.”
  1. Have the “Luck of the Irish.” Neither Watson nor his partner are of Irish descent. While they have worked incredibly hard, Watson recognizes and appreciates that he has benefitted from luck, good fortune, and serendipity.
  1. Have the right concept. With Ozy, Watson believed he had the right idea, even if news was struggling. When pitching his idea to investors, evening news programs were failing, and native digital media properties were not attractive to Silicon Valley investors. With conviction in his concept, Watson was able to attract initial investors.
  1. Hire a (great) CFO and head of human resources (HR) earlier. The biggest thing Watson would have done differently is hire a terrific CFO and HR director earlier in Ozy’s lifecycle. Ozy grew so quickly that they needed the support. “I think HR is sexy again,” said Watson.

The M&A Litmus Test: Part 2

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Today is Day Two of your M&A Litmus Test, so we’ll continue by testing how well you know your …

…Fiduciary Duties.

Do your directors truly understand their role as fiduciaries? Corporate directors have duties of care and loyalty under state law, and these duties apply to the merger context. (The overarching duty of good faith—basically meaning integrity—need not be discussed here.) The duty of care requires that directors be informed and exercise appropriate diligence and good faith as they make business decisions and otherwise fulfill their general oversight responsibilities. The duty of loyalty requires that directors act in the best interests of the corporation rather than in their own interests.

When reviewing plans to buy another company, sell a company unit, or merge with another company, the board needs to exercise proper oversight of management (duty of care) especially in issues of strategy, pricing, and compliance with various legal obligations, such as disclosure obligations.

The board also needs to exercise independence (duty of loyalty). It can do this by maintaining its independence, and by appointing a special committee of the board composed entirely of independent directors to review a particular transaction.

One director who appreciates the importance of fiduciary duties in mergers is NACD Advisory Board member and HealthSouth director Charles M. Elson, who directs the John L. Weinberg Center for Corporate Governance at the University of Delaware. Recently we discussed the following question: What are the most important cases alleging violation of fiduciary duties in a merger? Two of his top picks were Revlon and Smith v. Van Gorkom.

Here are case summaries, according to Charles:

1. Revlon Inc. v. McAndrews & Forbes Holdings, Inc., Del. Supr., 506 A.2d 173 (1986). The court held that once the sale of a company has become inevitable, the directors of that company must seek to maximize the sale price for stockholders’ benefit.

In June, 1985, Pantry Pride approached Revlon to propose a friendly acquisition. Revlon declined the offer. In August, 1985, Revlon’s board recommended that shareholders reject the offer. Revlon then initiated certain defensive tactics. It sought other bidders. Pantry Pride raised its bid again. Revlon negotiated a deal with Forstmann Little & Co. that included a lock-up provision. Revlon also provided Forstmann with additional financial information that it did not provide to Pantry Pride. Eventually, an increased bid from Pantry Pride prompted an increased bid from Forstmann Little. The new bid was conditioned upon, among other things, the receipt by Forstmann Little of a lock-up option to purchase two Revlon divisions at a price that was substantially lower than the lowest estimate of value established by Revlon’s investment banker. It also included a “no shop” provision that prevented Revlon from considering bids from any third party. The board immediately accepted the Forstmann Little offer, even though Pantry Pride had increased its bid.

The questions before the court were: 1. whether the lock-up agreements were permitted under Delaware State law and 2. whether the Revlon board had acted prudently.

The Delaware Supreme Court held the following:

  • Lock-ups and related agreements are permitted under Delaware law if their adoption is untainted by director interests or other breaches of fiduciary duties. The actions taken by the directors in this case did not meet that standard.
  • Concern for various corporate constituencies is proper when addressing a takeover threat.
  • Proper concern for multiple constituencies is limited by the requirement that there be some rationally related benefits accruing to the stockholders, and there were no such benefits in this case.
  • When the sale of a company becomes inevitable, the duty of the board of directors changes from preservation of the corporate entity to maximization of the company’s value at a sale for the stockholders’ benefit. (This has come to be called the “Revlon doctrine.”)
  • The board’s actions are not protected by the business judgment rule.

2. Smith v. Van Gorkom, Del. Supr., 488 A.2d 858 (1985). The business judgment rule fails to protect directors who make uninformed judgments.

Shareholders brought a class action against the board of directors of Trans-Union Corporation, alleging that the board was grossly negligent in its duty of care to the shareholders for recommending that the shareholders approve a merger agreement at $55 per share. Although the price per share was well above current market values, the shareholders alleged that it was inadequate. The Delaware Court of Chancery granted the directors summary judgment, and the shareholders appealed. The Delaware Supreme Court indicated that it would closely scrutinize the process by which the board’s decision was made.

Historically, courts generally did not interfere with the good faith business decisions of a corporate board; however, this case eroded that principle, and the court embarked on a road of increasing judicial scrutiny of business decisions. The court struck down the long-accepted practice of affording corporate directors the almost ironclad presumption that, in making business decisions, the directors act on an informed basis. Instead, it held that the determination of whether the business judgment of a board of directors is informed turns on whether the directors have essentially followed certain procedures to inform themselves prior to making business decisions. The court went on to say that there is no protection under the business judgment rule for directors who have made uninformed judgments.

Words to the wise from an experienced director!

Are you ready for Day Three?

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