Biopharmaceutical Private Equity Fund Investing: A General Counsel's Perspective
Challenges and responsibilities of General Counsel — an interview with Adele Kittredge Murray of Aisling Capital
Julia Emenhiser | UC Davis School of Law
Posted Monday, May 1, 2006
6 U.C. Davis Bus. L.J. 21 (2006)

Adele Murray serves as the General Counsel of Aisling Capital. Prior to joining Aisling Capital, Ms. Murray was the General Counsel of MedicaLogic/Medscape, Inc., a publicly traded company that specialized in healthcare information technology. Before joining MedicaLogic/Medscape, Ms. Murray was an attorney for Olsten Corporation, a global, publicly traded company that provided staffing, specialty pharmaceutical products and health care services.

Ms. Murray received a B.A. in Government from the University of Notre Dame, and a J.D., cum laude, from New York Law School.

Q: What are the special legal concerns that you deal with relating to the fact that Aisling Capital specializes in biopharmaceutical companies?

A: Intellectual property law and regulatory compliance are two of the most critical legal considerations when investing in the biotechnology sector. A biotechnology company's ability to secure patents for its laboratory discoveries enhances its intrinsic value and provides incentives for private sector investment in biotechnology development. Protecting its intellectual property is a key factor for a company's expansion and economic success. Biotechnology companies must comply with both domestic and international law and regulations addressing clinical, laboratory, and marketing practices. Companies that effectively implement policies and procedures to track and ensure compliance with the broad array of regulations can differentiate themselves from others and such a program can be a determining factor in the company's success.

Q: As General Counsel, what role do you play in positioning your portfolio companies in the public stock markets, arranging follow-on financing and other such activities?

A: Once a portfolio company decides to pursue an initial public offering, I review the financing documents from the last financing round to determine what rights the fund may have related to the initial public offering and to determine which provisions the IPO triggers, such as automatic conversion of preferred stock. I will also review and negotiate the lock-up agreement with the underwriters. And, I will review the registration statement on Form S-1, particularly any reference to the fund or to any of the directors serving as the fund's representative. On occasion, the fund will be a selling stockholder in the initial public offering and then there are additional documents to review and negotiate.

If a company is pursuing a new private round of financing, I will work with my colleagues and with the company in negotiating the new financing terms. It is important for the fund, its representative on the board and the company to fulfill their respective fiduciary duties. The role of a general counsel is to help ensure that the duties and responsibilities of each party are clear and that any conflicts are dealt with appropriately.

Q: What are your primary due diligence considerations when determining which companies to incorporate into your fund's portfolio?

A: Clearly, due diligence is an extremely important process for all private equity firms. Private equity firms ordinarily outline a due diligence process in the private placement memorandum consistent with their area of focus and expertise. After the fund is raised, I think in general, it is important to establish what the investment thesis is for each potential portfolio company and to make certain that after conducting due diligence, the results support the investment thesis. Investment professionals must take a disciplined and objective approach to conducting due diligence. If the diligence and the analysis of the portfolio company reveal weaknesses, whether with the product or the management, you must be prepared to walk away from the investment, even if it is very late in the process.

Q: Once a company relationship has been established, what are the duties, responsibilities, and challenges that General Counsel might face?

A: As the General Counsel, I represent the interests of the fund, the general partner and the limited partners. I also represent the interest of the manager of the fund. However, I do not represent the interests of a portfolio company. The challenge arises when the interests of the fund, the general partner, the limited partners and/or the manager are not aligned with the best interests of the portfolio company. For example, conflicts with regard to a portfolio company's valuation arise when a portfolio company needs to raise a new round of financing because it failed to achieve certain developmental milestones.

Q: The Securities and Exchange Commission (SEC) initiated new rules in December that loosened the restrictions for seasoned issuers (S3 category) with regard to what sort of information can be divulged beyond the registration statement during the waiting period (i.e. tombstone ads, road shows, forward looking statements, etc.). What input does the fund's legal counsel have in determining what sort of information is revealed in these statements? Has the new regulation affected your role?

A: As the legal counsel for the fund, I do not get involved in the preparation of a registration statement or in any information revealed by the portfolio company during the waiting period except for any reference to the fund or a director representing the fund. The portfolio company's counsel will prepare the registration statement and advise the company regarding what information can be revealed in any related documents. As a consequence, the new rules do not affect my role.

Q: With regard to SEC filing requirements, what ones do you deal with most often, and are the most pertinent to your business?

A: As a private equity firm, we typically invest in private placements and often take a significant ownership position in a portfolio company. The fund will usually have a representative on the board of directors. Once a portfolio company completes its initial public offering (IPO), the fund and the director serving as a representative of the fund will need to comply with the complex disclosure requirements of Section 13 and Section 16 of the Securities Exchange Act of 1934.[1] The Section 16 filings are the reports filed by officers, directors, and beneficial owners of more than 10% of the outstanding shares of the company. The most common SEC filings for our fund include reporting of beneficial ownership of securities on Schedules 13D and 13G, reporting of transactions pursuant to Section 16(a) and compliance with the reporting required pursuant to Section 13(f).

Q: What impact does Sarbanes-Oxley[2] have on your portfolio companies and their ability to go public? What impact has governmental legislation such as the USA PATRIOT Act had on private equity funds and your role as General Counsel?

A: Private equity firms typically place a representative for the fund on the portfolio company board in order to monitor the performance of the management team and to play a role in the strategic direction of the company. Sarbanes-Oxley has affected the composition of the board of directors and the audit committee and increased the importance of the role of the independent director and his or her obligation to the portfolio company. The additional requirements imposed by Sarbanes-Oxley have added a significant burden on directors and made it more difficult to find qualified individuals willing to serve as independent directors.

Sarbanes-Oxley is primarily an issue for the portfolio company. The cost, resources and time necessary to comply with the Sarbanes-Oxley Act are definitely considerations for the portfolio company. However, access to the public capital markets often trumps the burden of complying with Sarbanes-Oxley. Due to the exorbitant cost of conducting research and clinical trials, the biotechnology sector has an insatiable need for capital. Since the biotechnology IPO market is cyclical, the cost of not going public when the window is open could, in the end, be greater than the cost of complying with Sarbanes-Oxley.

Legislation such as the USA PATRIOT Act,[3] the Gramm-Leach-Bliley Act[4] and various other federal, state and local rules impose numerous requirements on funds and their managers. Some of these requirements, for example, involve compliance with anti-money laundering standards, and a "know-your-customer" rule. A fund needs to have controls and policies in place in order to adhere to all such laws, rules and regulations.

Q: As a relatively new Fund, do you find that there is more room for creativity and innovation? If so, does this make your job more challenging?

A: Having an opportunity to structure a new partnership agreement for a new fund is an incredibly complex and rewarding intellectual exercise. Private equity firms typically raise a new fund every three to five years. Within that time period, changes occur in the economy, the marketplace, financing instruments and regulatory requirements. This affords the fund an opportunity to incorporate new concepts and developments that have arisen since the last fund offering. One can also think about the current trends of the marketplace and try to anticipate the future needs and to create flexibility to capture future opportunities for the fund.

Of course, I think that there is room for creativity and innovation no matter what stage of development for a fund.

[1] 15 U.S.C. § 78a et seq (2006).

[2] Pub. L. No. 107-204 (2002) (codified in scattered sections of 18 U.S.C.).

[3] Pub. L. No. 107-56 (2001) (codified in scattered sections).

[4] Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L. No. 106-102 (1999) (codified in scattered sections of 15 U.S.C).