With just 200,000 residents and about 95 inches of snow a year, Rochester, N.Y., couldn’t be farther removed from Silicon Valley’s booming population, mild climate and concentration of startups and capital.
But don’t assume that the upstate New York city is a VC wasteland, says Lori Green of Nixon Peabody.
A 27-year resident of Rochester, Green says her location is irrelevant in the age of Skype, easy air travel and conference calls. Her specialties include energy, health care, life sciences and manufacturing and technology, and about 70% of her clients are companies. The balance are investors or private equity funds.
She likens her role in complicated deals, M&A, joint ventures and rounds of financing to playing quarterback. Green savors big deals, but is equally passionate about working with entrepreneurs and company founders, particularly when she can advise them in a single, life-changing transaction, such as selling their business. That was the case this fall, when she counseled Rochester-based R. Brooks Associates to a winning score.
Rolls-Royce acquired R. Brooks Associates in September in a transaction led by Green and colleague Scott Cristman. Brooks, which provides nuclear testing and inspection services, wasn’t looking for a buyer, but was willing to talk when it was approached by the British aircraft engine and equipment company.
Terms of the acquisition, which Green described as a significant deal “on the lower end of the middle market,” weren’t disclosed, but Rolls-Royce was quoted in news articles saying it acquired gross assets of $14 million.
“From a lawyer’s perspective, it was very satisfying,” Green says. “It wasn’t a complex deal, but it required additional skills in guidance and advice.”
Green was also a key player in a recapitalization deal last spring of the practice management company of North American Partners in Anesthesia (NAPA). NAPA claims it is the country’s largest single-specialty anesthesia company, with more than 700 employees and 70 offices in five states.
Moelis Capital Partners was involved in the recapitalization of NAPA Management Services Corp., the management company. Green said the terms of the deal, which were not disclosed, were heavily negotiated. She is working on an acquisition that will help NAPA continue to grow.
The high hopes that investors and entrepreneurs held at the start of the year have fizzled as the economy continues to sag.
The first eight months of the year were “a pretty robust M&A market in general,” Green says, but the deals closing now are the ones that were started months ago, not anything new.
The IPO market, too, remains underwhelming, with acquisitions trumping offerings as the preferred means of exit.
VCs are proceeding warily, opting for follow-on rounds rather than new investments. When they are shelling out rounds of Series A financing, the recipients are partners and businesses they know. Green also has noted VCs staking smaller claims, investing $250,000 to $500,000—typical seed capital levels—“to make sure there’s smart money on the table right out of the box.”
Green is seeing an increased focus on protective provisions in later rounds. These restrictions typically fall away as VCs grow more comfortable with a company and the investment. But with the economy on shaky ground, VCs are hanging onto as much protection as they can get.
Historically, Green says, thresholds for the incurrence of debt rise with each round of funding. But now, VCs have been insisting that companies they fund don’t take on additional debt without their OK.
“It’s a desire to keep a tighter rein on the economics of their investment,” she says.
Companies are pushing back, but unless they’re in a hot sector or have a highly desired product, they don’t have much leverage. Some have tried to tie the removal of protective provisions with achieving a certain EBITDA, but, Green notes, a company has its best leverage is in the first round.
Green is seeing an increased focus on anti-corruption concerns in light of a new U.K. law that metes out “broad, sweeping, significant damages” for violators. The law is open-ended and nebulous, and it hasn’t yet been tested in courts, so it’s unclear how it will be applied, Green says, but U.S.-based companies with U.K. subsidiaries and U.K.-based companies with U.S. subsidiaries are watching carefully.
The new law puts the risk allocation on the sellers in M&A deals, Green says.
“This has become a very, very hot area of negotiation,” she says, adding that she encourages sellers to address the issue up front, head on, in a robust letter of intent, though this extra step can slow negotiations.
“On the buyers’ side, of course, we advise the opposite,” she notes dryly.
Material Adverse Changes Clauses
Material adverse change (MAC) provisions or material adverse effects (MAE) clauses have increasingly become the norm in M&A agreements, according to Nixon Peabody’s 10th annual review of such documents.
The firm’s survey of more than 300 public documents submitted to the Securities and Exchange Commission found that 89% contained a MAC, up from 85% in 2010. The clauses are a series of representations and warranties about the business’ condition. The prospective buyer can walk away from the deal if those conditions change between an acquisition agreement and the deal’s close. Sellers dislike them because they’re considered pro-buyer, Green notes, and their terms are heavily negotiated.
MAC clauses made headlines in August, when Cerebus Capital Management and Chatham Lodging Trust cited them as grounds for backing out of their $1.1 billion deal to buy 64 hotels from Innkeepers Trust. Innkeepers has sued to force the would-be buyers to fulfill their agreement.
To avoid similar legal battles, Green advises her clients to carefully define—using specific dollar amounts—what constitutes a MAC. When parties fail to agree upfront on who will bear the risk of adverse effects, they really are implicitly agreeing to let the courts decide that question, she notes.
The View from Rochester
Green connects with local entrepreneurs, angels and VCs through her board position with High Tech Rochester, which operates a tech incubator, technical assistance and training for entrepreneurs.
Kodak, Bausch & Lomb, Xerox and other Rochester-based companies have been a fertile spawning ground for local entrepreneurs.
Nixon Peabody’s Capital Connector, the firm’s proprietary referral service, plays matchmaker for potential investors and entrepreneurs and business owners. The service this year has introduced more 480 potential funders to more than 100 companies.
June D. Bell is a San Francisco Bay Area-based legal affairs reporter. She can be reached at email@example.com.Attorney at a GlanceLori GreenAge: 52
Hometown: Long Island, NY; a Rochester resident for 27 years
Education: Undergraduate degree in mathematics from the State University of New York, Binghamton, in 1981; law degree from Boston University in 1984
On her iPad: “Sarah’s Key” by Tatiana de Rosnay; “The Glass Room” by Simon Mawer and Thomas L. Friedman; “That Used To Be Us: How America Fell Behind In The World It Invented and How We Can Come Back” by Michael Mandelbaum; and many issues of cooking magazines
Hobbies: Spending time with her husband and their 16-year-old daughter and 13-year-old son, cooking, tennis, puzzles, including jigsaw puzzles and Sudoku, plus a variety of word games and puzzles, particularly Boggle