RULES OF THE ROAD: CVC BOARD MEMBER AND …files.dlapiper.com/files/upload/Final-Rev-Combined-BMG_DLA-Board... · Roles of Board Members and Observers ... Micro-management by Directors

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RULES OF THE ROAD:CVC BOARD MEMBER AND OBSERVER BEST PRACTICESTuesday, September 18, 2012 | 9:00 a.m. PDT

If you cannot hear us speaking, please make sure you have called the teleconference number on your invitation. US participants: +1 800 7418620 France: 0800911922 United Kingdom: 08005280641 Netherlands: 08000226881 Germany: 08001807083 Switzerland: 0800896803 US Toll +1 212 231 2936The audio portion is available via conference call. It is not broadcast through your computer.*This webinar is offered for informational purposes only, and the content should not be construed as legal advice on any matter.

Presenters

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Patty BurkePartner

Bell Mason Group+1 831 688 6181

[email protected]

James MawsonFounder and Editor

Global Corporate [email protected]

Mark F. RadcliffePartner and Head of Corporate

Venture Capital PracticeDLA Piper

+1 650 833 [email protected]

Do not copy or distribute

Agenda

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Introduction: CVC Era of Global Expansion | Participant PollJames Mawson

Characteristics of Outstanding CVC Board Members Delicate Balance: VC and CVC Objectives and RolesPatty Burke

Roles of Board Members and Observers | The 3 Most Frequent Mistakes and How to Avoid ThemMark Radcliffe

Poll Results / Q&A


Corporate Venturing begins its Golden Age

Corporate Venturing

begins its Golden Age

James Mawson, Global Corporate VenturingGlobal University Venturing

4Do not copy or distribute

Industry SizeSector Number of

Companies

Industrial 100IT 100Health 100Media 100Utilities 75Consumer >50

Services 50Financial Services 50Transport >50Energy 50

Global Corporate Venturing covers:• 10 economic sectors• 750 programmes


Assets under Management

• Corporate Venturing assets: c$75‐150bn in >750 funds and programmes.

• US VC industry: $350bn raised 2001 to 2010


Fundraising

• Aggregate >$1bn in first quarter 2012:– 15 new venturing programmes– Another 20 new funds from established plans

• Past two years there was >$10bn committed to more than 200 new programmes and funds.


Name Fund Size Sector RegionLVMH L Capital $500m Consumer EuropeWellcome Trust Sigma Partners $300m Health EuropeFidelity Fidelity Growth Partners Asia $250m IT AsiaEvonik Evonik Ventures $130m Industrial EuropeIntel Connected Car Fund $100m Transport USAccess Industries Access BridgeGap Ventures $75m Health RoWKDDI Open Innovation Fund $65m Utilities AsiaHapoalim Undisclosed $20m Financial RoWFifth Third Bancorp West Capital $6-8m Financial USSaudi Aramco Internal N/A Clean-tech RoWMahindra Satyam/SBI Undisclosed N/A IT AsiaPinel Advocates Pinel Venture Capital N/A Services EuropeLinkage Linkage Ventures N/A IT USLive Nation LN Labs Fund N/A Media USMWW MWW Ventures N/A Services USTurner Broadcasting Media Camp N/A Media USTakata Lakeland N/A Industrial AsiaJohnson Controls Undisclosed N/A Industrial US

CVC Fundraising Data 2012 Q1

Source: Global Corporate Venturing8


2011 Fundraising Q1

Name HQ Fund Name Size Sector

JP Morgan US Digital Media $1.2bn media

Tencent China Industrial CollaborationRMB5bn ($760m) IT

IDG US IDG Ventures India Fund II $175m* media

IDG V. Growth and Mezzanine $3-400m media

IDG Ventures Korea Fund II $150m* media

IDG (China) $1.3bn media

IDG V. Vietnam Fund & Growth $400m* media

SAP Germany SAP Ventures $350m ITEuropean Investment Fund*

Luxem-bourg European Co-Investment

€250m ($340m)

fund of funds

European Investment Fund*

Luxem-bourg BioE 2020

€250m ($340m) health

Merck US Merck Global Health Innovation $125m healthBMW Germany BMW I Ventures $100m transport

Source: Global Corporate Venturing9


Deals

• In 12 months to end‐June, GCV tracked 943 deals worth aggregate $20.5bn, of which US two‐thirds ‐ $16bn in 647 deals.

• Prior 12 months, 841 deals globally with aggregate value of $18bn. (US made up $12.5bn in 579 deals.)

• CVC increasingly important for money, technology validation, M&A exit.

• Corporations looking increasingly early‐stage – growth of accelerator/seed programmes.

• Academia joining the ecosystem with university and student‐run fund/incubators.


Market Trends• Increased fundraising across sectors and regions – non‐

Western markets growing as quickly as US.• Deal flow follows innovation, cross‐sectors and regions• Corporations complement VCs, collaborate with academia to

commercialise innovation• Corporate venturing as tool improve internal productivity,

map growth areas, achieve better mergers, acquisitions, partnerships (MAP strategy), under a coordinated CIO role


Thank you

James Mawson

Founder and Editor, Global Corporate VenturingGlobal University Venturing

[email protected]


Agenda

Introduction: CVC Era of Global Expansion and Participant PollJames Mawson


Characteristics of Outstanding CVC Board Members | Delicate Balance: VC and CVC Objectives and RolesPatty Burke



Poll Results / Q&APoll Results / Q&A


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The Board’s Essential Roles*Maximize shareholder value

Attract, recruit and retain management and board membersMentor, task and measure the executive team

Provide insight, business perspective and expertiseOversee and promote fiscal, legal and ethical governance

Bottom Line: Team, Strategic Advisory, Exit

Most Common Pitfall:Micro-management by Directors with operational or domain expertise – indicates the bigger issue is talent

Introduction: The Role of the Board

© 2012 Bell Mason Group Do not copy or distribute

Setting the High Bar: Characteristics of Outstanding Board Members

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Domain / operational knowledge

But. . . advice, judgment:

not operational intervention

JudgmentBalanced view

‘Pattern’ / track record in uncertain situations

Ask the hard questionsWhat’s around the bend thatthey can’t see

Drive dialog, consensus, decisions

Explore divergent views to

get closure

PreparationEfficient,

substantive discussions


The High-Value CVC Board Member/Observer

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Checks the corporate hat at the door‘Ask not what the company can do for you, ask what you can do for the company’

Understands the company’s business model and strategyNot just the area relevantto the parent

Investment viewed as apartnershipReserves for future rounds

Brings deep customer insightsAnd understandingof emerging industrytrends or dynamics


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The High-Value CVC Board Member/Observer

Earns RespectFrom venture management and syndicate by consistently adding business value

RecusesImmediately whenfaced with conflict of interest

Full DisclosureOf objectives and position on conflicts before closing --- a ‘prenup agreement’

AdvisesTranslates commercial relationship with parent, knows when to intervene or remain hands-off

17© 2012 Bell Mason Group Do not copy or distribute

Balancing Act: Corporate and VC Objectives

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Mutual understanding of objectives is critical Strategic, vs. VC sole focus on

financial VC tracking to exit at all times

Managing conflicting objectives

Competitive relationships, acquisitions

M&A valuation negotiations


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Balancing Act: Challenging Scenarios

Product/Market Focus Shift –

Corporate or Venture Mismatch between parent sales

force / customer priorities and portfolio company offerings

Executive Transition

Strong CVC / parent relationships with CEO are double-edged sword


VC Perspective on Corporate Investors: The Good, The Bad, The Ugly

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Good Timely access to

expertise, partners; market credibility

Commercial relationships establish revenue base; potential exit

Bad Revolving door –

no BoD continuity (expertise, institutional knowledge)

CVC unit lacks access or internal intros; meetings not relevant, time sink for entrepreneur

Ugly Lack of firewall between

investment and other corporate units with competitive interests

Lack of reserves for subsequent rounds undermines fundraising story


Agenda

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Poll Results / Q&APoll Results / Q&A

DLA Piper LLP (US) Do not copy or distribute

Expensive mistakes: $58,700,000

Directors (not observers) have fiduciary duties to corporation: highest duty imposed by law

Duties are personal

Lexar v. Toshiba Trade secrets of Lexar disclosed by Toshiba director to competitor

Damage award: $465,000,000 Damages awarded for breach of fiduciary duty: $58,700,000 for each of Toshiba

and Toshiba America (and $8.2M in interest) for a total of $125,600,000 Case set for new trial and settled on a confidential basis

Cases to watch Craigslist v. eBay over alleged trade secret violations by eBay director

Mired in discovery

22DLA Piper LLP (US) Do not copy or distribute

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Board observer/board member

Rules for board member: statute Fiduciary duties: loyalty/care/good faith

Rules for board observer: contract Director v. observer No voting rights Can be excluded during certain discussions Information rights are contractual

Role of board member/observerMonitor portfolio company for investor Assistance in relationship to corporate investor, use the halo effect Shape product roadmap of portfolio company Assist in portfolio company strategy Sales strategy International expansion


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The role of the board

Governing standards:

State corporation law: Delaware General Corporation Law (DGCL) California General Corporation Law (CGCL) Related case law

Corporate charter (certificate of incorporation or articles of incorporation)

Bylaws


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Basic responsibility of the board:

“The business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board” (CGCL, § 300(a))


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The role of the board: legal overview

Duties of the board of directors include: Selecting/appointing/terminating senior executives

Appointing independent auditors (although this is becoming a function of the audit committee in public companies)

Assuring the accuracy of financial statements

Establishing corporate plans and objectives and monitoring management’s performance

Reviewing and passing on major corporate actions (such as acquisitions, declaration of dividends)

Establishing key corporate policies and programs and monitoring compliance (such as investment, public disclosure, environmental)

Assessing takeover or merger proposals


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Delegation of duties:

Corporate officers: The board may delegate management of the day-to-day business operations of the corporation to the corporation’s officers

Committees: The board may delegate any powers of the board, except for

certain acts specified by statute, to committees of the board


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Fiduciary duties of directors

The duty of care:“A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, . . . with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances” (CGCL, § 309(a))

The duty of loyalty:“A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders . . .” (CGCL, § 309(a))


Thinking about the duty of care


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Fiduciary duties of directors

Business Judgment Rule: Presumption in favor of board decisions if taken on informed

basis and in good faith

Rationale:“Because businessmen and women are correctly perceived as possessing skills, information and judgment not possessed by reviewing courts and because there is a great social utility in encouraging the allocation of assets and the evaluation and assumption of economic risk by those with such skill and information, courts have long been reluctant to second-guess such decisions when they appear to have been made in good faith” In re J.P. Stevens & Co. Shareholder litigation


Understanding the Business Judgment Rule


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Three major errors

A corporate board member is an operational executive from a related business division

Misunderstanding role: representing the interests of the corporate investor rather than the portfolio company

Failure to disclose conflict of interest and recuse yourself


Agenda

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Poll Results / Q&A


Questions?

34

Patty BurkePartner

Bell Mason Group+1 831 688 6181

[email protected]

James MawsonFounder and Editor

Global Corporate [email protected]

Mark F. RadcliffePartner and Head of Corporate

Venture Capital PracticeDLA Piper

+1 650 833 [email protected]


Closing

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Documents

RULES OF THE ROAD: CVC BOARD MEMBER AND …files.dlapiper.com/files/upload/Final-Rev-Combined-BMG_DLA-Board... · Roles of Board Members and Observers ... Micro-management by Directors