Stephen Brock Testimony to Nevada Legislature re Chancery Court – Full Transcript

1. Testimony Mr. Stephen Brock Chief Executive Officer Public Company Management Corporation NEVADA LEGISLATURE LEGISLATIVE COMMISSION’S SUBCOMMITTEE TO STUDY THE BENEFITS, COSTS, AND FEASIBILITY OF THE IMPLEMENTATION OF COURTS OF CHANCERY (Assembly Concurrent Resolution No. 35, File No. 109, Statutes of Nevada 2007) 9:00 AM May 28, 2008 Room 4401 Grant Sawyer Building 555 East Washington Avenue Las Vegas, Nevada Ladies and gentlemen of the Subcommittee, and legislative counsel… It is an honor and a pleasure to be here today to talk with you about the tremendous opportunity that lies before the State of Nevada. The opportunity to be America’s business leader in the 21st Century. In your first meeting, on January 28, the Subcommittee heard from Nevada's current business court judges who explained how they currently function. That meeting included a policy discussion about the pros and cons of a pure equity chancery court versus the current business court system. In your second meeting, on March 18, you heard from a panel of leading business court experts who provided you with information about the business courts and complex litigation courts established in other jurisdictions around the nation. They also provided information regarding Delaware's Court of Chancery. As you know, the chancery court option was somewhat discouraged by that panel. For the record, I share those sentiments and favor an institutionalized business court solely dedicated to settling business-related litigation.

2. It was noted in your second meeting that Nevada's business court is fairly similar to others that have been established. One notable difference is that Nevada does not publish written opinions from its business court cases. Another related difference is that Nevada's business court judges hear general civil and criminal cases in addition to the business court docket. Most, if not all, of the other states have business court judges that only hear business cases. And, finally, another notable difference is that Nevada’s judges are elected and other Chancery court and business court judges are appointed. Today, I would like to offer some focused comments on 1) the revenue potential of an institutionalized business court, 2) the costs that would likely be incurred implementing such a court, and 3) a roadmap for the implementation of such a court. Most importantly, I would like to provide the Subcommittee with a unique context for analyzing and appraising the institutionalized business court option. Most importantly, in my view, a robust business court system operating in the State of Nevada would provide businesses registered here with an element of predictability that is critical to the formation of capital, the minimization of business risk, and the maximization of revenue, profit, and shareholder value. And that predictability, if Nevada is successful in providing it, will be critical to Nevada’s own capital formation, the minimization of our State’s cost of capital, and the maximization of our State’s revenue stream. I’d now like to offer my analysis and projections for the revenue stream that the Commercial Recordings Division might generate if Nevada were to offer the added incentive of an institutionalized business court. And we’re talking about a court that would settle business litigation, so it might be most appropriate to frame our discussion in business terms. I’ll explain as I provide you with my analysis.

3. During fiscal year 2007. The State of Nevada’s Commercial Recordings Division generated approximately $82.0 million in revenue directly related to entities formed and maintained on the record in the Secretary of State's office. At the end of calendar year 2007, there were approximately 315,000 entities on file at that Division. These numbers imply that the total revenue generated by each registrant averages roughly $260.00 per year. I want to analyze this total revenue number from both a quantity and a quality perspective. First, let’s look at the quantityaspect… Specifically, Nevada’s initial fee for the registration of a new entity is $50 for a non-profit entity and $75 for a for-profit entity. This includes corporations, limited liability companies, limited partnership, limited liability partnerships, limited liability limited partnerships, and business trusts. Importantly, corporations may require a larger fee, up to $35,000, based on their capitalization. Figures from the Nevada Secretary of State’s office indicate that our State’s average initial fee is currently $85 per registrant. Once organized, a fee for an initial list of officers is required and, thereafter, a fee for an updated list of officers is due annually. Unless there is an amendment or other change to the information in an entity’s original article, the annual list and associated fee are all that is required to keep an entity in good standing. The annual fee is $25 for a non-profit entity and $125 for a for-profit entity. Corporations may require a fee of up to $11,100 based upon capitalization. Figures supplied by the Secretary of State’s office indicate hat, in fiscal year 2007, our State’s average recurring revenue fee was $177 per registrant. And this is where an institutionalized business court enters the picture… the predictability provided to businesses by a highly efficient business court can be a major factor in attracting

4. large-capitalization companies to our State. And larger capitalization companies generate substantially higher fees. I’d now like to look at the quality aspect of the Commercial Recording Division’s total revenue figure… As I’ve discussed, the Division’s total revenue figure has two components… initial and recurring. It is this secondcomponent that can be so important because it recurs year-in and year-out with little effort of cost expended. In fact, the Wall Street financial community refers to this sort of revenue stream as “recurring revenue”. Wall Street values this type of revenue stream very highly because it is predictable and because it is highly profitable. Simply put, instead of having to go out and spend money on competing to win over new customers, your existing customers generate annual revenue for you. And this recurring revenue stream has no “customer acquisition costs,” such as marketing expenditures, attached to it. In fact, the costs associated with a recurring revenue stream are often limited to check processing cots. Looked at another way, the costs associated with “retaining” a customer are typically much lower than the costs of “acquiring” a customer. This, again, is where an institutionalized business court enters the picture… the predictability provided to businesses by a highly efficient business court can be a major factor in retaining large-capitalization companies as registrants in Nevada. And, as I mentioned earlier, larger capitalization companies generate substantially higher fees. And, make no mistake about it… Wall Street understands that all revenue dollars are not created equal. The Wall Street firms that assign ratings to our State’s bonds understand that recurring revenue streams are less risky, and that can result in a lower cost of capital for our State. Over time, a lower cost of capital can save our State millions of dollars in interest payments.

5. And that brings us to revenue projections… It’s clear from the analysis that I’ve just provided that the State of Nevada has a wide variety of ways that it can increase the total revenue generated by the Commercial Recordings Division. Specifically, new service enhancements, most notably an institutionalized business court, combined with expanded outreach activity, most notably a a well-crafted and well-executed marketing program, could generate substantial increases in 1) the number of new Nevada registrants, 2) the number of new Nevada registrants that are high capitalization companies, 3) the State’s customer retention rate, 4) average total revenue per registrant, and 5) average recurring revenue per registrant. Given the wide array of opportunities for the State to increase this revenue base, I believe that it’s reasonable to expect that the Commercial Recording Division’s total annual revenue could be increased dramatically from the recent $82 million with a business court system in place. The costs necessary to support this projected revenue increase are actually quite palatable from a return on investment standpoint… The State of Delaware’s Chancery Court, considered to be a key factor in that State’s dominance of the company registration market in the US, has a fiscal year 2008 operating budget of just $3.1 million, and that figure represents just 3.5% of the Delaware’s total $89.1 million judiciary budget. General fund revenue collections by the Delaware Department of State have increased 33.0% since 2000 to a new record of $701 million in fiscal year 2007. On the marketing side, I propose that the State implement an incentive program that directly funds marketing expenses out of revenue generated. For instance, the Nevada Secretary of State’s office might be awarded a marketing budget equal to 5.0% of all revenue generated by that office over a certain baseline.

6. Looking forward, it is imperative for the Subcommittee to understand that the corporate charter market in the U.S. is becoming increasingly competitive. Lured by the success of Delaware in creating a powerful revenue machine, various states across all regions of the U.S. are creating incentives for entities to incorporate in their jurisdictions. And this intensive competition is spreading into the international arena. Simply put, failure to move forward will likely result in being left behind in the highly competitive space for corporate charters. I would like to thank the Subcommittee for this opportunity to present my views on the importance of establishing an institutionalized business court in the State of Nevada. And I look forward to making further contributions to this effort as it progresses.