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General Administration

BPM-111 Entrepreneurial Entities

August 6, 2013

POLICY

These policies and procedures have been adopted to give general guidance relating to situations in which the University has equity in a private company or an equity-like involvement with an outside entity as part of an entrepreneurial activity.  They have been created in alignment with Collected Rules & Regulations (CRR) 70.070 – Entrepreneurial Activity.

PURPOSE

This policy applies to equity interests acquired or held by the University in order to pursue entrepreneurial activities for programmatic purposes.  In order for participation in an entrepreneurial activity entity to be approved under this policy, it must be for a programmatic purpose, which means primarily for the purpose of advancing a University mission such as instruction, research, public service, or University-related economic development (including technology transfer), or as dictated by the terms of a restricted gift or grant, with respect to gift or grant funds to be invested in a venture, as accepted by the University in accordance with its applicable policies, and secondarily, if at all, to generate an investment return.  In order to establish a programmatic purpose, the terms and conditions of the University investment should specify and document, in concrete terms, how the University mission(s) will be advanced and provide reasonable means to monitor the University investment and ensure it is used for its intended purpose.

In summary, any proposal to invest or accept equity interests in a private entity, under CRR 70.070, should satisfy at least one of the following requirements:

  1. It should be a program-related asset.  The following factors are relevant to determining whether a proposal qualifies as such:
    • The University buys and holds the asset primarily to accomplish a University mission (the asset or transaction must have more than a “tangential tie” to the stated mission), and not as a financial asset for investment purposes, and
    • The University’s investment in the asset should be reasonably related, in nature and amount, to accomplishment of the stated mission, but if an asset by its nature has an incidental investment purpose, it should be subject to reasonable investment criteria, and
    • The University’s establishment of the relevant program and the contractual documentation for each transaction should state the University’s mission(s) and the means for advancing them, including mechanisms for monitoring, evidencing, or ensuring accomplishment of the programmatic purposes; or
  2. It should be in fulfillment of the terms of a restricted gift or grant, as set forth in the gift or grant instrument, which has been duly accepted by the University.

The foregoing requirements are in addition to any others that may apply under the terms of CRR 70.070, including the BPM section being adopted pursuant to CRR 70.070, or applicable law.

If participation in a venture is primarily for investment purposes, then it is subject to the University’s investment policies (CRR 140) and may not be approved under this policy. This and other situations not covered by this policy are described below under the Scope section of this policy.

DEFINITIONS

Entrepreneurial Entities.  Entrepreneurial Entities are outside entities or relationships in which the University holds an equity interest for programmatic purposes.  Most of the situations in which the University holds equity interests are divided into three broad categories for purposes of these policies: operating entities, joint venture entities, and minority-interest entities. 

Equity Interests.  Equity interests as described in this policy include

  • shares, membership units, limited partnership interests, and the like;
  • other rights convertible to equity; or
  • in certain circumstances, contract relationships that involve the common pursuit of a business transaction or opportunity and sharing of profits and losses.

Joint Venture Entities.  A separate legal entity or relationship in which both the University and one or more third parties have significant participation or control.  It is typically formed as the vehicle for cooperation between the University and one or more third parties with respect to a specific transaction or transactions with a programmatic purpose. Joint Venture Entities primarily differ from Minority-Interest Entities in that they are characterized by substantial University participation and/or control such as an economic interest that is large in absolute terms or relative to other participants, voting or veto rights that enable the exercise of authority over the policies and direction of the entity, ancillary contractual or other relationships resulting in active or integral involvement in its operations, or other circumstances that would cause the University and the entity to be affiliates under applicable law.  Relationships in which the University’s approved contribution of cash is greater than or equal to 50% of the total book value and $1.0 million or more is always deemed to be a Joint Venture Entity, even if it might otherwise be characterized as a Minority-Interest Entity.  In all other cases in which there is any doubt, whether a relationship is a Joint Venture Entity or Minority-Interest Entity will be determined by the President.

Minority-Interest Entity.  A separate legal entity or relationship in which the University owns a minority interest (less than 50%) and is more of a passive investor.  The University may receive and hold a minority stake in an entity in exchange for cash, as in-kind consideration for goods and services (e.g., in exchange for a license of intellectual property or services such as sponsored research, fee-for-services activities, or a lease of space), or as part of an educational or research program, but in all cases it must be for a programmatic purpose.

Operating Entities.  Separate legal entities may be created and used by the University to own assets or conduct operations on its behalf and under its control.

Sponsoring Unit.  The individual office, department, college, school, division, or similar business unit at a campus or at the system, which is sponsoring participation in a particular Entrepreneurial Entity, as designated by the campus Chancellor (if the campus is sponsoring the entity) or President (if the system is sponsoring the entity).

SCOPE

This policy applies only when the University acquires or holds an equity interest in order to pursue an entrepreneurial activity for programmatic purposes.

Most Entrepreneurial Entities will involve the creation and management (by the University or others) of a separate legal entity, such as a corporation, LLC, limited partnership, foundation, or trust, but some may not.  Some situations may not clearly fall within a category, or may have elements of more than one, or the University’s involvement in an entity may shift between categories over time, in which case the application of these policies will be on a case-by-case basis.

  1. Matters Outside the Scope of this Policy.  As noted above, this policy does not apply to investments made by the University, or a unit of the University, of cash and reserves, the primary purpose of which is to generate a market rate of return to support the operations of the University or a unit of the University, which are governed by the University’s investment policies.  Generally, all equity interests held by the University will be subject to either this policy or the investment policies, except as otherwise expressly provided in the Collected Rules and Regulations or specified or approved by the Board of Curators.
    This policy also does not apply to the following situations:
    1. 501(c)3 foundations and similar organizations established for campus development activities, which are governed by a separate policy specific to this activity; or
    2. School or college investments in programmatic activities that by their very nature generate revenues through charges for goods and services, including prime-sub arrangements, which are governed by generally-applicable University rules, policies, and procedures; or
    3. Membership in broad-based membership entities not under University control such as professional or industry associations or research consortia where the University is not taking any real equity interest.
  2. Coordination of this Policy.  Except as noted above, all equity interests held by the University, present and future, are intended to be covered by this policy; however, some entities in existence as of the date hereof may be subject to binding contractual or gift terms or similar third-party requirements inconsistent with this policy, and funds received in the future may impose such requirements as a condition of funding.  The adoption of this policy is not intended to violate any such requirements that have been or may be duly authorized and accepted by the University.  Any such existing requirements should be reported within a reasonable period of time after the date hereof, and any future requirements should be raised as part of the approval process described herein. Similarly, while existing entities will not be reevaluated for programmatic purposes, any proposed additional investment in such entities should be evaluated for programmatic purposes as part of the approval process.

AUTHORIZATION

Participation in any Entrepreneurial Entities shall be approved in accordance with CRR 70.070: Entrepreneurial Activity.  Information about the formation and status of the entities will be provided to the Board annually at the first fall semester regular meeting.

  1. Authorization to Form or Participate in Operating and Joint Venture Entities
    1. Required Information:

      1) Basic Information.  The information provided in seeking approval will include, but not be limited to: the name of the entity; the purpose; the legal nature of the entity; the programmatic purposes (i.e., the relevant University missions and the manner in which the project will advance those missions); information about other participating parties; the percent interest and the extent to which the university will exercise control or influence over the entity; the nature and amount of the university’s contribution and source of funds; University employee participation in the operations or governance and the make-up of any governing board; disclosures of conflicts of interest; a business plan including pro forma financial statements as appropriate; proposed exit strategies; and any other information as requested by the campus Chancellor and/or the President.  Where an entity requires approval from the Board of Curators, the business plan and associated financial information to be submitted as part of the approval process should be provided to the Executive Vice President for Academic Affairs, for review by such official and by the Vice President for Finance and Administration, before it is submitted to the President.
      2) Cost/Benefit Analysis.  The information submitted will also include the rationale for pursuing the project with the proposed Entrepreneurial Entity and other participating parties, including a list of alternatives that were considered (e.g., the University pursuing the venture directly through a prime-sub or other service contract arrangement, or with different participating parties), the process used to identify and evaluate alternatives, and a cost/benefit analysis of why the proposal is preferable above the other alternatives.
    2. Delegation of Authority:  As part of the approval process, new and special delegated authority to act post-formation in exercising a right, granting consent, and/or converting or liquidating the equity interest, and/or taking other material actions for and on behalf of the entity, may be specified; otherwise, the rules specified below under the Ongoing Operations and Liquidation section of this policy will apply.
    3. Applicability of University Policies:  All operating entities, and any joint venture entities in which the University has a controlling or significant interest (e.g., if the University provides personnel or significant funds to support the entity’s operations, if the entity supplies essential facilities, goods or services for the University’s operations or missions, and/or if the University and the entity are deemed to be affiliates) or which poses a material compliance risk to the University, or if otherwise required by law, will comply with the CRRs, UM Business Policy Manual, and other generally-applicable University rules, policies, and procedures in the execution of their on-going operations unless otherwise exempted as part of the approval process when the entity is established or subsequently modified and approved in writing by the Chancellor and President (if the campus is sponsoring the entity) or the President (if the system is sponsoring the entity).
  2. Authorization to Participate in a Minority-Interest Entity
    1. Required Information: The information provided in seeking approval will include, but not be limited to the Basic Information described above under the Authorization to Form or Participate in Operating and Joint Venture Entities section of this policy.
    2. Delegation of Authority: As part of the approval process, a new and special delegated authority to act, post-formation, in exercising a right, granting consent, and/or converting or liquidating the equity interest may be specified, including any ability of the Chancellor to re-delegate campus authority; otherwise, the rules specified below under the Ongoing Operations and Liquidation section of this policy will apply.
    3. Cash Investment in Exchange for Equity: In addition to the required information specified in 2.a. and elsewhere in this policy, the following minimum terms will be required for approval of any cash investment by a school, college, or campus in exchange for equity in a company with intellectual property (IP) arising out of the faculty from such school, college or campus, where a significant programmatic purpose of such investment is the advancement of such IP.
      1. The investment is in a company that has been selected by the University of Missouri Enterprise Investment Program (EIP) for early stage funding to accelerate development of the IP,
      2. The investment is invested on the terms set by EIP (e.g., milestones and convertible debt with an option to convert to equity),
      3. Any return of/on investment or loss is shared between EIP and the investing entity on a pro rata basis,
      4. The investment is from revenues that do not arise from tuition or state support, and
      5. The investment is approved by the Chancellor and the President, or the President's designee.
  3. Conflict of Interest Policy: In all cases, any university employees who have or acquire a direct or indirect interest in a proposed or existing entity must fully comply with the University's conflict of interest policy (CRR 330.015) and any other applicable CRRs, including by obtaining any approvals that may be required by the conflict of interest policy before final approval is sought pursuant to this policy, as well as by disclosing as appropriate and not participating in negotiations on behalf of the University. Their participation in the entity, as owner, manager, or otherwise, will be in their individual capacity and not for the University, and they are advised to retain their own legal, tax, accounting, and financial advisors and may not rely on the University.

DUE DILIGENCE IN THE ACCEPTANCE OF EQUITY IN ENTITIES

The Sponsoring Unit is responsible for appropriate due diligence before participating in any Entrepreneurial Entity, subject to any requirements imposed by the campus Chancellor or President as part of the approval process.

  1. Substantiation of Value: Participation in Entrepreneurial Entities requires appropriate due diligence including at a minimum documentation and substantiation of the value to be contributed and received and also including, as appropriate, a reasonable investigation and confirmation of the information submitted as part of the approval process such as: the definition and validation of the purpose and fit with a University mission; a critical review of the business plan and pro forma financials, including revenue and cost assumptions; a review of recent, historical financial statements for an existing entity; inquiries into the status, reputation, financial history and strength of proposed partners; an evaluation of potential conflicts of interest by officers and owners of the proposed entity; and consideration of the feasibility of proposed exit strategies.
  2. Financial Operations: As part of the due diligence process, the Sponsoring Unit shall work with the Controller's office to determine the correct way to account for the acquisition, ownership, and sale of equity, in terms of characterization, valuation, tax basis, and for pass-through entities, reporting of income/losses (including the analysis of debt-financed income and other UBIT issues and the payment of phantom income), and how to track these items for purposes of university audits (GASB) and tax returns (IRC).
  3. Risk Review: Due diligence should also include conflict of interest, legal, compliance and risk management reviews including where appropriate: potential liability or other legal exposure posed for University employees and/or the University through participation in a private company; any legal limitations on the University imputed to the private entity including identification of any external legal limitations such as federal, state and local requirements that would apply to the operations and activities of the entities, as well as internal legal, policy, or procedure limitations such as the CRRs; the extent to which the University insurance program applies to the University's or its employees' engagement in the activities of the entity.
  4. Back Office Operations: For Operating and Joint Venture Entities, the Sponsoring Unit will document who is responsible for legal, compliance, accounting, preparation and filing of tax returns, and other back office operations and whether the University will provide these services and the related charges.

TERMS AND CONDITIONS

The Campus or System Business Office, in consultation with the Sponsoring Unit, is responsible negotiating and approving the recommended terms and conditions for participation in an Entrepreneurial Entity, subject to any requirements specified in this policy or otherwise imposed by the campus Chancellor or President as part of the approval process. This section is intended to provide guidance for suggested terms and conditions, not all of which are absolute requirements, but including these terms and conditions may facilitate approval. Standard forms of some equity-related agreements that include these and other terms and conditions are available from the Office of General Counsel.

  1. University participation in Operating and Joint Venture Entities includes the following terms and conditions:
    1. limitations on capital calls;
    2. waivers of exclusivity and other fiduciary duty claims against the University;
    3. an obligation to adopt a conflict policy;
    4. the requirement to submit periodic financial statements or other reports, including an annual outside audit if appropriate;
    5. the requirement to carry specified insurance;
    6. the requirement that the University have representation on the entity board and/or that it have certain veto powers as an owner as appropriate (e.g., no incurrence of debt, formation of subsidiaries, related party transactions, merger or dissolution, etc. without University consent);
    7. the requirement for pass-through entities to make special tax distributions; and
    8. provisions for dissolution, withdrawal, and exit.

    Other terms and conditions may be required, or recommended but not required, as part of the approval process. Exceptions must be approved.
  2. University participation in Minority-Interest Entities generally includes the following terms and conditions:
    1. limitations on capital calls;
    2. waivers of exclusivity and other fiduciary duty claims against the University;
    3. the requirement to submit periodic financial statements or other reports;
    4. the University should not have voting representation on the entity board but may have non-voting observer rights on the board;
    5. limitations on related party transactions;
    6. the requirement for pass-through entities to make special tax distributions; and
    7. provisions for withdrawal and exit.

    Other terms and conditions may be required, or recommended but not required, as part of the approval process. Exceptions must be approved.

MONITORING AND REPORTING

  1. Monitoring: The Sponsoring Unit is responsible for monitoring any Entrepreneurial Entities for which it is responsible and reporting any events or activities as required by this policy. Material changes in ownership or financial condition, material changes in operations that cause the entity to diverge from its stated purpose and associated University mission or constitute a material deviation from previous expectations, and any extraordinary transactions that may materially affect the nature, value, or percentage of equity or incidental rights held by the University, that may cause tax or other direct financial consequences to the University, or that otherwise require consent of the University, must be reported by the Sponsoring Unit to the Executive Vice President for Academic Affairs in a timely manner and, if known, before they occur.
  2. Annual Statements and Reports: Annually, each campus will collect from all Entrepreneurial Entities copies of their annual financial statements and an annual reporting form. These annual statements and reports will be submitted to the Vice President for Finance and Administration.

    The Vice President for Finance and Administration will be responsible for reviewing the annual reporting forms and any current reports provided by the Sponsoring Unit to determine any material changes in ownership and the financial statements to determine any significant changes in the financial status and the financial viability as an on-going concern.
  3. Fiscal Year-End Report: Annually at fiscal year-end, each campus Chancellor will prepare a report on all its sponsored Entrepreneurial Entities, and the Executive Vice President for Academic Affairs will prepare a report for system-sponsored entities. The campus reports will be submitted to the Executive Vice President for Academic Affairs, who will compile a system-wide report for the Board of Curators with copies to the Vice President for Finance and Administration, the Controller, the President, and General Counsel. The President shall prescribe the form and content of the report which shall include, but not be limited to, a copy of the annual financial statements and reporting form for each entity.

ON-GOING OPERATIONS AND LIQUIDATION

  1. Governing Policies: Operating and certain Joint Venture Entities will comply with University rules, policies, and procedures in the execution of their on-going operations unless exempted as delineated in Authorization section of these policies. Minority-Interest Entities' own operations generally are not subject to University rules, policies, and procedures. In all cases, the University's own actions are subject to all applicable rules, policies, and procedures, and applicable law, and all University employees with any interest in an entity are subject to the University's conflict of interest policy at all times.
  2. Change in Scope: Except as otherwise contemplated in the original approval, if the approved purpose or operations of the entity change or are proposed to change materially and in such a manner that requires consent of, has tax or similar consequences to, or gives rise to liquidity or other rights for the benefit of the University, new approval must be sought in accordance with the Authorization section of these policies.
  3. Liquidation: Except as otherwise contemplated in the original approval, the sale, transfer, or other liquidation or disposal of equity interests shall be subject to the following guidelines:
    1. With respect to Operating and Joint Venture Entities, the decision to sell or transfer equity interests in an entity, or to voluntarily dissolve or liquidate an entity, will require approval in accordance with the Authorization section of these policies.
    2. With respect to Minority-Interest Entities:
      1. The University's general preference and policy is that equity interests subject to this policy be liquidated at the first reasonable opportunity. The University's policy is not to hold shares for speculative purposes.
      2. All equity interests and other non-cash property subject to this policy, whether in exchange for a license or sale or waiver of a patent or copyright, services, or otherwise, will be held, sold, or otherwise liquidated at the discretion of the University. The University's Office of the Treasurer will manage the disposal of such property held by the University. Where such property is received in exchange for a license or sale or waiver of a patent or copyright, and liquidation cannot take place immediately, proceeds will not be distributed until liquidation occurs.
  4. Other Actions. Subject to the foregoing and to any other restrictions contained in the original approval or delegation of authority specified as part of the original approval, if any, the campus Chancellor or designee (for an entity with a campus Sponsoring Unit) or the President or designee (for an entity with a system Sponsoring Unit) may designate University representatives on the governing board of the Entrepreneurial Entity, if any, exercise University rights with respect to its equity interests in the entity, and take other ordinary course actions as participant in the entity.

INTERNAL ALLOCATION AND PAYMENT OF PROCEEDS

  1. Ownership. All University equity and other interests in Entrepreneurial Entities is owned by the Curators of the University of Missouri. Within the Curators of the University of Missouri, the equity shall be assigned to the campus or system, whichever is sponsoring the entity. All such equity and all proceeds or property received with respect to such equity shall remain the property of the University at all times, until it is distributed by the University pursuant to this policy.
  2. Operating and Joint Venture Entities.
    1. University net income generated by an Operating or Joint Venture Entity will accrue to the campus or system, whichever is sponsoring the entity, after all University expenses incurred in the formation and operation of the entity are recovered and distributed. Net income accruing to the campus sponsoring the entity will be under the direction of the campus Chancellor with approval by the President or in the case of the system under the direction of the Executive Vice President for Academic Affairs with approval by the President.
    2. Upon liquidation of an Operating or Joint Venture Entity, any proceeds, gain or loss will accrue to the campus sponsoring the entity under direction of the campus Chancellor with approval by the President, or to the system under direction of the Executive Vice President for Academic Affairs with approval by the President.
  3. Minority Interest Entities. University cash proceeds received with respect to equity in a Minority-Interest Entity, including dividends or distributions of net income or upon sale or other liquidation, will be distributed according the CRRs as it would have been distributed had cash been received in the original transaction.