When Micron Technology Inc., an $87-million Boise, Idaho, manufacturer of semiconductor memory components, went public last year, its prospectus contained an unusual feature. It disclosed that the company had offered to buy back from employees more than 1 million shares of stock, because the stock may have been issued in violation of federal and state securities laws.
This buy-back offer, technically referred to as a "rescission offer," is a common penalty imposed by states for violations of their securities laws. Since Micron employees purchased their stock at an average price of 85? a share, and the stock, at press time, was trading at 11 1/8, it is unlikely that any employees took Micron up on its offer. But the prospectus also discloses that the company might continue to be liable indefinitely, which means that if the market price ever falls below the employees' purchase price, the company could be required to repurchase the shares, with interest.
The Micron rescission offer is unusual only in that it was publicly disclosed in the company's prospectus. Lawyers who specialize in representing entrepreneurial clients say that it is all too common for start-up outfits to neglect legal technicalities at the beginning, only to find themselves in expensive trouble further down the line. It hits hardest when, for example, outside investors won't advance money without a detailed examination of the transcripts of a company's directors and stockholders meetings -- transcripts that the company suddenly realizes have never existed.
Common problems reported by lawyers include:
* failure to establish a board of directors; or if one is established, failure of the board to approve company transactions;
* violation of securities laws, including, for example, failure to acquire federal and state approval for sales of stock, or failure to provide investors with adequate disclosure about the company;
* failure to keep accurate stock records.
Remedies range from the relatively simple (such as preparation of documents ratifying past transactions) to the merely inconvenient (dissolution of the company and transfer of its assets to a new legal entity) to the potentially disastrous (rescission offers and litigation). And almost every complication is expensive. Says Steven E. Wynne, a lawyer in Portland, Ore.: "Over the past two years, I've run into at least five companies that needed to be totally reorganized in order to do a financing. The legal work for that alone, apart from any financing costs, was upwards of $30,000, with no tangible benefit to the bottom line."