Definition: Right of First Refusal

The term right of first refusal is a critical term in a variety of contractual settings. These include investor term sheets, licenses, and even partnership agreements. What the term typically enables a party to do is participate in, purchase, or decline some interest before a third party does. So for example, investor term sheets often provide that the investor in a particular series of stock, can purchase some amount of stock in the next round before anyone else does. In the partnership context, the clause prevents one partner from selling his half of the company to a stranger, since the selling partner must first give the opportunity to buy his half to the other partner. These clauses are often critical as they safeguard a variety of interests. An investor may want to protect his position as someone on the "ground floor," while the partner should feel secure that he need not run the company with a stranger.

As a related point, the clause generally does not force the obligated party to commit to a deal worse than one offered by a third party. So again, for example in a partnership, if the selling partner is offered a million dollars by a third party, he need not sell for a lesser amount to his partner. Rather, the purchasing partner must match the third party offer and buy the share for at least a million dollars.

Time is of the Essence Clause in Promisory Notes

A client recently asked me why there was a “Time is of the Essence” ("TOE") clause in a promissory note drafted for him by the other party’s attorney. This is one of those rare clauses that means what it says and says what it means. Contracts cannot speak to every possible issue and frankly as good as your attorney is, he will never be omniscient. Hence, there are a variety of issues that can arise in a contract dispute where elucidating language is either absent or the language that is present is equivocal at best. One major issue that arises in promissory notes is the timing of payment. Although most notes will speak to the issue with clear payment milestones sometimes in conjunction with stated grace and late payments, a TOE clause can still help. What the clause does is eliminate any argument that the stated deadlines provide any leeway. More importantly, the clause transforms a failure to meet the deadlines into a “material breach.” In laymen’s terms, a material breach is not a fracture of the contract, but an out and out break, which nullifies it and potentially leads to greater damages. In a promissory note, a TOE clause plus an acceleration clause can have severe consequences for the debtor who breaches by failing to meet deadlines.

So in summary, if you want to really keep someone on the hook when it comes to timing, a TOE clause might be what you need.

UC Inks Digitization Deal with Google

While the pretty girl in the news was Google’s newly inked deal with the Paris Hilton of technology, MySpace, it’s shy sister, the deal with the University of California university system (“UC”) is stepping into the limelight. As part of the Google Book Search Project, that daring and controversial undertaking to digitize the world of literature, UC will now share “millions” of its total 34 million title library. This is another significant if not high profile victory for Google, which continues to face a fierce copyright lawsuit against the BSP by the Authors’ Guild. For a discussion on the copyright law’s Fair Use Doctrine and its application to this case, you can go here, here and of course at YouTube which hosts a full Larry Lessig lecture on the subject.

Ultimately, it might be that the fate of the BSP will be decided in the forum of peer to peer opinion, not the courts, if Google continues to ink and effectuate deals at this rate. Currently, the University of Michigan, Harvard, Oxford, Stanford, and the New York Public Library, have all agreed to participate. Ironically, some are even “double dipping,” such as UC which is also a member of Yahoo’s competing initiative the Open Content Alliance. Further still, UC has adopted the position only heretofore supported by Michigan, that the Fair Use Doctrine applies. And as a result, it has agreed to share copyrighted and public domain works with Google.

With this universe of content being globally accessible, albeit in bite sized snippets, a court ruling may prove to be short lived. I suspect that Congress faced with the technological inevitability of the BSP’s core proposition will step in. As a policy matter, the issues are too far reaching to allow a situation where Google successfully opens the digi-floodgates and the courts unilaterally shut it down.

Non-Profit Identity Crisis, am I Tax Exempt or Not?--Form 1023 and the IRS Popularity Contest

Often, I am asked by a client if filing for a non profit corporation with their state authority means that the client's operation is automatically tax exempt. The answer is no.  The state is merely providing recognition for your entity at that juncture.

One must understand that filing for a non-profit corporation alone does not qualify one as a so called "501c."  Rather, the federal government must determine if it will provide your newly filed corporation 501 status.  Hence, the IRS is the agency that tells you whether your operating income is tax exempt or if donations are tax deductible to the donor.  And unfortunately, it is possible that you go through the trouble of filing for a non-profit corporation at the state level only to find out the IRS has denied you 501 status and most of the tax exempt privileges that flow from it.  In addition, the Form 1023 is your opportunity to notify the IRS that you are seeking “public charity status” as opposed to “private foundation status.”  The latter carries a great many restrictions as to the monetary sources and allocations it makes and is generally subject to greater scrutiny.

Fortunately, a single application is filed with the IRS, the form 1023, to determine if your operation qualifies. Form 1023 is a comprehensive application for tax exempt status that will survey the nooks and crannies of your operation.  Properly navigating the form is critical for achieving your long term non-profit goals.  Form 1023 is roughly comprised of three intertwined components, the narrative portion, financial portion, and questionnaire portion.  While the narrative portions ask you about the nature and mission of your operation, the other portions are geared towards the fiscal characteristics.  For example, as part of the form, you will have to provide among other things a basic breakdown of projected expenses and funding sources.

Also, bear in mind that, under federal law, the contents of the application are public in nature and that your operation will have to maintain records for public inspection under certain circumstances.  As a result, a great way to get a sense of what a properly completed 1023 form looks like is to visit websites of various non profits.  However, be aware that these are slightly out of date as the form 1023 has been recently revised.  Nonetheless these should give a good idea of what some of the basic  Requirements are.

While the form may seem accessible, one should consult a professional.  Typically, the form 1023 is completed in conjunction with an attorney and accountant who are knowledgeable about non profits and of course your operation/your vision.  You can get a form 1023 here.  

Lecture at Harvard and Our Paper

We are very excited about our upcoming lecture this Friday at Harvard Law School (home of the Berkman Center for Internet & Society), as featured guests at the 2006 Wikimedia Conference (“Wikimania 06” August 4th-6th). Wikimania 06 is the second international conference organized by the Wikimedia Foundation. It is the main forum for new media professionals and academics focused on the issues and challenges confronting wiki and open source technologies. In addition, we will present a research paper for Wikimania.

We will discuss a topic that I have broached on this blog before, the boundaries of defamation law on the Internet.  I also have discussed the provisions and application of §230 of the Communications Decency Act of 1996 (“CDA”).  

The short public paper (we have a law review article as well, chocked full of academic legalese) authored by myself and my partner, Olivera, discusses a proposed amendment designed to rollback some of 230’s impact while retaining the spirit of fostering the Internet within the CDA.  Our paper in its original form can be read here.  Also, for those of you who are more wiki open source minded, it also being hosted on Wikipedia here.