Massachusetts Noncomp Law Explained

My recent post flagged adoption of the new Mass law regulating noncomps by statute for the first time in the State, basically limiting noncomps to one year and requiring some payment during the restricted period.  Some important details to note:

*You cannot restrict non-exempt employees or interns at all.  This is for senior people only.

*If someone breaches a noncomp, the period can be extended to two years.

*There are mechanical steps and timing to get a valid noncomp from a new hire, including 10 day advance notice and flagging the right for the employee to have counsel.

*If an employer approaches a current employee for a noncomp, there must be a benefit to the employee, typically a raise or other “fair and reasonable consideration”; unlike some other states, notably NY, mere continued employment is not enough.  There is no definition of what kinds of benefit must be offered, and I smell litigation on the horizon.

*In a sale of a business where an employee gets a big payday, due to equity ownership or otherwise, a broader noncomp can be enforced provided the employee receives “significant consideration or benefit”– I smell further litigation on the horizon defining what is “significant.”

*Restrictions must be reasonable geographically and cover the specific services provided during the last two years (unless you can make a compelling argument for other services).

*If you fire an employee without cause or lay him/her off, your noncomp will not be enforced.

*The law covers people employed here and Mass residents employed elsewhere.

*Caveat: at the same time, Mass is enacting the Uniform Trade Secrets Act, which in some States has been interpreted as allowing the enjoining of competition, even without an agreement (!), if new employment would result in “inevitable disclosure” of trade secrets to a competitor, reports the Boston Business Journal (quoting an attorney in my firm, btw). Mass has never in the past entertained the “inevitable disclosure”doctrine under prior law, but then again they never had this new law on the books.  So stay tuned.


Big news Tuesday was Musk announcing he might take Company private and had the financing lined up.  Not surprisingly, the market price of the stock rose towards his stated tender price of $420 per share.

Equally not surprising, on Wednesday the SEC queried the Company for the basis of these remarks.   Seemingly the Board had been alerted.  Is there basis for Musk saying he had the money?  It is $72 Billion.

This move will occasion substantial scrutiny from another source, as the bump in Tesla stock price puts the Company over the conversion price of almost a Billion dollars of convertible bonds that mature next March, with a conversion price of about $360 per share.  If the stock price stays above that number, the bonds convert without the Company needing to fund the shortfall between market price and strike price in a cash distribution.

Wire services and the WSJ are all over this so stay tuned to your own media sources, but if Musk jumped the gun on whether funds are secured there is going to be heck to pay….

New Mass Law Restricts Noncomp Agreements

The Governor last week signed the long-awaited Massachusetts statute that deeply cuts back the enforceability of non-comp agreements for employees. The Act applies to all agreements made on or after October  1.   A detailed analysis will follow, but note that now:

*Maximum time is one year.

*To enforce the agreement, an employer must pay at least half base pay for the term of the restriction, unless employee breached a duty to employer (so called “garden leave” provisions).

*No noncomp will be enforced against employees let go without cause.  (This will put pressure on contractual definitions of “cause”).

*Employers can still prevent poaching of employees or pitching employer customers.

*Noncomps made in connection with the sale of a business will still be enforced.

Not quite California, where most noncomps are void, period; but a radical change in Mass business law.



SCOTUS: Sales Taxes Now Interstate

Today the US Supreme Court ruled that any State into which sales of goods or services are made may collect a sales tax from the seller, even if that seller has no place of business or other contact within or with that State.  This ruling upsets settled law and affects sales by on-line retailers, advertisers who run ads in papers and magazines, radio and TV offers.  Although large retailers will need to comply, they have the ability to set up collection methods and to remit sales taxes to various jurisdictions.  But what about the small seller?  How do you remit  State Sales Tax, County or Municipal Sales taxes?  How do you keep track of all the requirements, file all the forms, remit in timely fashion?  How do they handle audits, how do they defend against fines?

Note that in different jurisdictions different things are taxed, not just goods but services, digital products and software.  Which ones at what rates?

Let’s think ahead.  What is going to happen?  Some/many vendors will just stop selling or stay in one or a few States.  Many vendors will revert to national vendors to handle their goods — Amazon, Google, other giants now or hereafter existing.  Perhaps a software solution, or an IT solution for smaller vendors, will present itself, serving as a center for filing, collection and payment. Can blockchain technology be merged with facilitated financial transfers on an automatic basis to instantaneously sort out the tax burden, report it and carve out and remit the taxes automatically, crediting the net-of-tax amount to the vendor?

On the other side of the coin, how will States enforce against the small or casual vendor on the other Coast?  Or in China or Europe?

This decision is a stunning reversal of the taxation of interstate commerce; will the Federal Government pass legislation addressing this issue?  Is it alterable by legislation or is this a Constitutional issue?  We will need to study the decision which is, today, “hot off the press.”

The Passive Activists

Public corporate boards used to quake at the prospect of an attack by the “activists.” These corporate “raiders” force management to abandon long-term strategy, sell off parts of their business, reduce R&D, increase prices, pump the stock value in the near term, and then cash out their investment. This would leave the loyal long-term stockholder holding the bag, which was by then pretty much empty.

Enter today the new “activist” investor. These are large, long-term holders of your equity. Think State Street and BlackRock. Think the Investor Stewardship Group, a consortium of the world’s largest investors holding perhaps 20% of the value of U.S. equities. These major investors are seeking dialogue with boards, according to a panel convened today in Newton by the New England Chapter of the National Association of Corporate Directors.

And what do these newly active investors want to discuss?

They counsel good corporate governance. They counsel focusing on long-term strategy, as they are “value” investors. They counsel listening to the old-time activists, because they might have a good idea, but not caving in immediately in order to avoid a proxy fight. They look for engaged discussions with directors, touching on such matters as the strategic use of big data, diversity, overall strategy for employee compensation, and adequacy of climate change reporting (as it bears on long-term strategy).

When the panel members from Black Rock and State Street were asked directly by the moderator, “well then, aren’t YOU the activist investors now?” there followed an awkward silence. The audience laughed. The panel declined to admit to such a role until one finally said, “well, perhaps activists with a small a.” How do BlackRock and State Street Investments like to view themselves? Not activists certainly; just “not passive.”

So the corporate landscape today contains two kinds of constituencies pressing upon boards of directors: the more now polite, but still-lurking, old-school activist directors seeking perhaps a change in the long-term strategic goals of a company; and, the major institutional equity investor seeking good governance and an articulated long-term strategic plan.

Bottom line from the institutional investors: directors should be available to speak with their major shareholders, and not just to create a relationship but, rather, to also provide substantive dialogue around matters important to long-term strategic direction.


Not Another Cyber Security Post?

Yes it is; bad news doesn’t always go away.  In this morning’s e-mail updates for us corporate lawyers, two depressing items:

First, the PCAOB (the agency overseeing the accounting for public companies) reported remarks on Friday from its deputy director for technology to the effect that companies “face hundreds, if not thousands of attempts to break into their systems on a daily basis….”  In the face of this onslaught, PCAOB is working on defining how audit teams should go about assessing the magnitude of cyber risk and defining acceptable governance policies. (Once this gets sorted out, expect the same CPA approaches to be applied to private company audits also.)

And today the SEC’s director of Corporate Finance (they pass on registration statement disclosure) announced that the staff is “looking closely” at cyber risk disclosure.  One focus is internal controls, to deal with response to a hack; are procedures in place to bring the data upstream to disclosure experts and general counsel?

On a less procedural note, the SEC speculated that companies might want to restrict trading in its shares by officers and directors when a hack is identified and material.  If a company were to take such a step, seems to me, they would have to make a public disclosure of that event, which might accelerate in some cases the reporting of data breaches; much criticism has been leveled at the dilatory pace at which some companies have announced material breaches. Such an acceleration would put great pressure on the early determination of a hack’s “materiality,” a concept in the securities laws which does have an accepted definition but in reality, much like the Supreme Court view of pornography: can’t define it but I darn well know it when I see it.

About Golden Shares

Golden Shares are equity interests with the power, within a corporate structure, to control a vote on some issue. Typically such shares are issued to creditors, who want to enforce superior rights in the event of a loan default, rather than being derailed by the equitable processes of Federal bankruptcy.  In such a case, a bankruptcy cannot be filed by a company unless the Golden Shares vote in favor.

Federal bankruptcy policy does not permit a creditor, before bankruptcy, to obtain a waiver of the company’s rights to file for bankruptcy.  If such waivers were permitted, every creditor would ask for one.  And the benefits of bankruptcy, including possible rehabilitation and fairness to creditors, would be thwarted.  Thus such agreements in all forms typically have been voided as against public policy.

But a bankruptcy court has no power to act upon any case unless, as a matter of proper corporate procedure, the bankruptcy case is duly authorized in the first instance.  If Golden Shares are properly included in the charter of a company, and thus corporate authority cannot be obtained to file the bankruptcy which thus gives the bankruptcy court any power, how can the bankruptcy court ever get so far as to over-rule the Golden Share’s power to ban bankruptcy?

The recent Federal District court case of In re Franchise Services permitted enforcement of Golden Share power, based on the following distinction: if the holder of Golden Shares got the shares for little or nominal consideration, then they really are not true corporate shares with enough economic interest within the debtor company to be given the vote, but rather they are just a gimmick to try to end-run public policy.  But in this case, the lender was a bona fide hard money equity investor, and as such could legally bargain for a control over bankruptcy to protect its investment.  The lender here only became a creditor after it was a material investor.  The Golden Shares were not a gimmick, but negotiated corporate rights afforded to a bona fide equity holder, and thus those shares could be properly voted as part of requisite corporate action and thus could be used to bar bankruptcy.

The case is on appeal to the Fifth Circuit, and there are prior cases on either side of this issue, so stay tuned.  And even if the decision in this case is upheld (that is, the Golden Shares of real equity investors can be sued to block company bankruptcy filing), there remain the following issues: Golden Shares obtained only to veto bankruptcy still will be ignored; it is not clear what metric should be used to measure the adequacy of the size of the equity interest needed to uphold the Golden Shares power; it is not clear as to the rights of an equity holder + lender if both the equity interest and the loan are made at the same time that the Golden Shares are issued (a not unusual business structure.)


At the end of last week, the Delaware Chancery Court refused to permit CBS independent directors to obtain a restraining order that would have prevented controlling shareholder Shari Redstone from interfering with the plan that the directors had devised to prevent Redstone from forcing a merger of CBS and Viacom.  The directors wanted to amend the CBS By-Laws to permit them to issue more stock and thus dilute Redstone’s vote so as to prevent the merger.

While the facts are complex and while there is no precedent for what the independent directors were attempting to do, the interesting part (at this stage) is that the Court held that, even though it was indeed possible that Redstone was breaching her fiduciary duty, Redstone and her allies had the right to protect their majority controlling interest from attack.  The court system would give relief after the fact if it were found there was a breach of fiduciary duty if a merger were to occur.

In Delaware mergers where controlling persons in effect self-deal, there are numerous ways to prevent abuse of power, including getting an independent director vote, setting up independent director committees, getting independent shareholder votes, and obtaining comfort from third party experts.  The courts are full of cases filed after the fact alleging that the minority was abused by majority control of a merger or acquisition. But here relief was sought before the fact, and even though there was an independent board committee that dis-recommended the merger, the Chancery weighed the equities and opted to protect the majority in exercising its control; there would be time later to do justice if required.

This is likely to be fast-moving, in that if a merger occurs it will be hard to unwind or calculate injury if the entities actually begin to operate as a single enterprise.   Stay tuned.

The Culture of Fine Wines?

95 Points James Suckling: A wine with beautiful strawberry and chocolate with hints of pie crust. It’s full-bodied with super integrated tannins and a long, long finish. Needs at least four to five years to really come together but so wonderful. Not the amazing 2009 but clearly outstanding.

 94 Points Wine Spectator: This delivers a slightly chewy-edged feel, with charcoal and roasted alder hints holding sway over the core of steeped damson plum, black currant and anise notes. Shows grip through the finish, but stays long, featuring a lovely backdrop of tar and warm stone.

 Winemaker Notes: The Chateau XXXXXXXXX is a dark color with a fine crimson tint. The wine offers notes of ripe fruit, mocha and vanilla along with powerful yet harmonious and smooth tannins.

 The above was received from a good friend and fine wine merchant, describing a wine on offer which I will not name as that is not the point.   The point is this:  as I understand it, this fine wine (at a mere $125 per bottle) tastes like charcoal, roasted alder, steeped damson plums, black currant, anise, tar, warm stone, strawberry, chocolate, pie crust, ripe fruit, mocha and vanilla.  What with its dark color, smooth tannins, grip, strength, chewy edge, length of finish, well – I for one cannot wait to taste it in at least four or five years when it is ready to drink.  I do hope to live that long, and I hope you the reader live that long also, because I am counting on YOU to buy a bottle of this stuff and lay it away in my wine cellar and drink it with me some day.  Because I ain’t paying $125 for a bottle of anything other than the Elixir of Youth….

 Final query: if this wine is at least four or five years from coming together (and given the description of flavors I can see that the wine needs mucho coming together), how do they know it is so great today?  I think I have a lot to learn, but I will learn about wine while laughing all the way.


CEO Pay Ratio Disclosure– Dumb and Dumber

I have posted before about how dumb it is to care about the ratio of a CEO’s pay to the median pay of all public company employees.  Even dumb ideas also generate unintended consequences, and now it is open season on the unexpected.

A little history. After the 2008 meltdown, Congress tried to earn some public brownie points by shaming CEOs, whose salaries were either blamed for the recession or were held up as an object for further outrage, by requiring this disclosure.  They needed someone to enforce it and chose the SEC, which after all was already in the business of demanding disclosures by public companies.  Of course, the SEC mandate is to protect the securities market and the people who invest in it; nothing to do with shaming CEOs or setting implicit social policy.

So the SEC took years to finally propose a rule that the SEC itself had not asked for and did not want.  About 8 years after the legislation was passed, this proxy season is the first time we get to see the ratio of CEO pay.  It is unclear to me that investors actually care, and they should not.

Overly simple example to make my point: assume that there is a public company with two employees.  Joe is the office gofer and makes $20,000 a year. Jane invented the app that earns the company $200,000,000,000 a year.  Jane is paid a thousand times multiple, higher than all but one multiple heretofore reported in the press: $200,000,000.  Leaving over $199 Billion on the table for the lucky shareholders.  I just love my stock position in Jane’s company.  As for my reaction to the ratio?  For my money (and it IS my money), give her more.  The securities markets and I the investor are safe and sound.  Jane is not shamed; she is underpaid.

Who IS upset by the high ratios?  Well, the press for one, it is headline news, see for example today’s issue of Boston Business Journal.

The compensation consulting firms.  What an opportunity to develop new metrics and sell more advice.

Employees, but not about the ratio.  They know they don’t earn like the CEO and shouldn’t.  No, they are interested in the median number, which is just incidental to the intent of the SEC rule.  Everyone earning less than the median feels underpaid; or so suggests the Boston Business Journal.

And now a member of the Massachusetts State Senate is proposing a tax law that will increase taxes on companies with a ratio exceeding 100.  Not only unintended, but would discourage public companies from locating here in Massachusetts.  And if one wants progressive income taxation, that should be imposed systematically, not in a way that punishes statistics based on happenstance or perhaps even efficient management.

Ironically, the only dog in this fight which is getting its intended result may be — the US Congress.  They wanted to shame CEOs, and they may get their way. (Here’s a random thought: the Congress that mandated this rule in 2010 is NOT of the same make-up as today’s Congress– one might speculated that today’s Congress does not want to shame these CEOs.)  Meanwhile, CEOs are looking at the ratios and, if they are ONLY paid 100 times the median, they may be planning to ask for a raise!

Just sayin’….