Proposed Mass Legislation: Employee Noncomps

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For several years, as noted in prior posts, Massachusetts has been toying with enactment of a law limiting permissible non-competition agreements for employees (other than those relating to the sale of a business). Yesterday the Mass House reported out of committee a bill far more complex and textured than prior efforts. While there can be no clue, let alone assurance, of what the Legislature will finally enact, if anything, nor what the Governor (historically silent on the matter) might sign, the draft legislation is fascinating and unlike any law of which I am aware in any other State. Highlights (lowlights) follow:

Who is covered? Employees (and independent contractors of certain types).

Who cannot be restricted? Low-paid employees (non-exempt), students on internship, anyone terminated without cause or laid off, anyone under 18.

How long can you restrict someone? Normally one year tops; if someone breaches his fiduciary duty or steals property/secrets whether physically or electronically, two years tops.

How broad a net can you cover? Aside from being necessary (not just convenient) to protect trade secrets or employer goodwill, an employer-imposed noncomp can only restrict to a geography in which the employee worked or had influence (not the area in which the company did business), and must relate to the tasks performed by the employee (not the overall business of the company).

Do you have to pay someone during the restricted period? Yes! Unless the employee breached a duty or stole secrets or property, you must pay at least 50% of highest annualized base salary paid during last two years. This is called “garden leave.” A major departure from prior practice in Massachusetts and the other States, this rule already has attracted negative comment from the Boston Chamber of Commerce.

Massachusetts courts have a history of redrawing noncomps to a standard which the judge considers reasonable to protect employers. Still possible? Nope, strictly prohibited.

What about a company with most of its operations out of state but with someone working in Massachusetts, or someone who is a Mass resident? The proposed law would apply, the company cannot elect the law of another State which is less favorable to the employee.

When would this come into effect? July 1, 2016, but only for agreements after that date and for misappropriations of information and property by employees after that date.

Employers often spring noncomps on employees when they first report for work or after they are hired, and such agreements were historically reviewed by the courts on an individual basis. Is there now a mandatory waiting period before a noncomp can attach to an employee? Yes, ten days with a right to say “no” which means there will be a mandatory lag time at the front end. If you are already working, you have ten days to say no (and I’ll bet you won’t be able to be fired if you say no). Employment noncomps must be in writing, signed by both sides, must expressly say that the employee is entitled to have a lawyer if sought after employment started and must be supported by “fair and reasonable consideration independent from the continuation of employment.”

Bottom line: if this proposed legislation becomes law, Massachusetts will move very far towards the California rule which is that, except in cases of a business sale, noncomps are not enforceable.

Changes to Accredited Investor Definition?

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The accredited investor definition is the well-known standard to permit persons of reasonable liquidity to invest in unregistered offerings of companies seeking capital; it facilitates the so-called Regulation D offerings which raise about as much investment capital as to all public offerings combined (2014 data). The SEC this May 18 will conduct a meeting of its Advisory Committee on Small and Emerging Businesses to consider revisions to this vital definition. Here are some of the SEC staff recommendations for consideration:

There likely will be revisions to the economic parameters. The present individual requirements (family net worth excluding principal residence of $1 Million, individual earnings of $200,000 or family earnings of $300,000) should remain, although those minimums now may invoke caps on investment amounts; higher economics may be established to qualify for avoidance of investment caps.

If an older-definition accredited person has invested in a given company, that investor will be “grandfathered” as fully accredited as to that particular company.

The present sole definition of accredited status, which is economic, should be expanded for some sophisticated investors, including experienced investors based on various definitions, certain professionals and those who pass an “investor examination.”

Of course it is not clear which if any proposal will be adopted, but the SEC this year seems committed to a systematic review of the accredited investor definition.

Real Crowdfunding Arrives– sorta

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When you open this post on Monday the 16th of May, you are doing so on the first day of truly general crowdfunding ability under Federal Law.  Until now, crowdfunding either did not allow the issuance of securities, or was limited to securities transactions that were otherwise exempt under Federal law (for example, offerings under State laws for deals within that State).

As of Monday, pursuant to the SEC’s “Regulation Crowdfunding, ” companies can offer securities anywhere, without Federal registration, to the ordinary citizen.  Almost….

Like all SEC regulations, this is complex but generally you should know: there are limits on the kinds of companies which can use this mechanism; there are limits on how much a company can raise in this manner in any year ($1 Million);   there are limits to the amount anyone or any entity is allowed to invest in any one company or in any one year; all transactions must be done through a broker dealer or SEC-approved portal; there are certain mandatory informational filings to be made by an offering company, and at least one year of follow-up filings.

There is more; but it is true that as of Monday someone with zero experience or knowledge in investing can invest thousands of dollars, anywhere in the US, in a company which may be shaky, may have no track record, and may be, well, a lousy bet.  Although it is assumed in the capital markets that companies of real commercial promise will avoid raising this “dumb money,” and the sophisticated finance and angel communities view this as a non-event, for struggling entrepreneurs with few options we are going to see this “democratization” of investment opportunity utilized in ways we cannot imagine — and with results we likely are unable at this point to foresee.  Whether this new device energizes innovation and employment, as Congress intended, or just lends itself to unfortunate fraud, remains to be seen.

Board Strategic Supervision in M&A

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It is company management which typically proposes, and almost always executes, an M&A transaction. What is the board of directors doing while all this is going on?

A panel at the May 10th Breakfast Meeting of the National Association of Corporate Directors-New England explored major M&A pitfalls. The most important: a proposal of an acquisition transaction which is not in line with the strategic direction of the company. Sometimes CEOs and management teams get excited about an acquisition which is off on a tangent. It is the role of the board to be forceful in questioning any such transactions; is it truly strategic, is it large enough to divert the company, what is the rationale and why should we be doing it?

Sometimes a subcommittee of a board is named in order to pursue a transaction. It is important that the subcommittee keep the board generally informed; no one likes surprises. If, in a large company, smaller acquisitions have been delegated to management, without board input, nonetheless management should be attentive to keeping the board posted so that board members are not embarrassed by a lack of knowledge as to what is going on in the company.

Sometimes stock ownership in a company can impact thinking about acquisitions. In a company with a private equity investor, there is time pressure for exit at a certain point; other shareholders may have an interest in maximizing value over a longer period of time. Sometimes there thus is pressure to achieve an acquisition because the market may be rewarding acquisitions, attracting PEs to overpay in order to maximize early exit value. These issues need to be sorted out by the board.

The board should be attentive to cultural fit. What is the motivation, and style of leadership, of the target and its executive team? Is it overly aggressive, so as to cause the board to ask management to double-check financials and projections? Will there be, in fact, an appropriate fit of cultures?

Directors have the task of making sure that a company fully evaluates an M&A transaction; perhaps the company should walk away. After all, for any major acquisition, it is the board which ultimately must pass upon it. It is the board’s responsibility to grant or withhold approval based on strategic or economic considerations.

Seen at Sixteen

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Spent half a day at mile 16 vantage point for the Boston Marathon, which is conveniently down the street from my house. Beautiful day to set up a folding chair in the sun, start on one of yesterday’s crossword puzzles and wait for the race to come to me.

First, the wheelchairs. Then the elite women. Then the elite men. All pretty inspiring. But the most inspiring is the next following couple of hours, when the remainder of the field, the vast majority of the 30,000 bib holders, trudge up the hill from Wellesley and the Charles River valley, crest with exhaustion, exhale, and start to trot down-hill towards the real “Newton Hills.”

Best sights at Sixteen:

The man with greying temples who stopped to carefully pet my dog. Must have been a hard hill for him, as he gave Popcorn the longest petting of the day.

The runners with broad bands of colored tape running up their legs and backs; informed by a runner standing nearby that the tape helped the muscles stretch.

People responding to their names, some on their shirts, some inked onto their arms or thighs. Most raised their arm and waved; some, grimly looking ahead, seemingly did not hear.

Amazing array of body types, from the lithe to the improbable. Very few with tattoos, I am sure tattoos were vastly unrepresented; something interesting about runners I suspect…

Shirts of all types, with schools and countries and running clubs and taverns and causes and diseases of all sorts being displayed, advertised, supported, stamped out.

Great empathy for a man roughly my age lumbering up the hill, so slowly you could easily read his shirt, which said in large letters: Just Do Not Suck.

But the best shirt must go to the man running with a guide next to him. Both had on the backs of their black shirts: The Voice inside of you that says you cannot do this is a Liar. He was past me onto the downhill until I realized he had no legs; his two metal blades sprung him downward towards Boston.

I was tempted to start calling out “You’re doing great, only 14 more miles to go” but my wife told me that was a sick joke and might not be taken well by the poor runners. She might have been right about that…..

Board Renewal: Some tips

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Tell me about your company’s board of directors. Is it, in the words of one panelist, “male, pale and stale”?

An expert panel at the Tuesday breakfast meeting of the National Association of Corporate Directors/New England explored techniques for making sure your board was correct for your company.

As boards tend to “hire in their own image,” there is a certain stagnation in board membership. Further, in public boards at least, people don’t turn over very quickly; only 7% of directors stepped down last year. But board diversity, in every sense, is highly desirable and proven by studies to benefit companies. How do you achieve it?

You must depersonalize the addition and removal of directors. If you need to replace someone on your board, it is not because you don’t value them or their judgment; it is just that you need different skill sets to deal with the company’s business issues.

Another technique is a rigorous program of board self-evaluations; most boards now evaluate at the board and committee levels but only 10% of public companies do a 360° analysis of each individual director. Advising a director as to how he or she is performing is not only good for the company, but also is a wakeup call for the director to either improve or to self-select off the board.

The panel also debunked the idea that you cannot find qualified women, or qualified diverse candidates ethnically, racially, geographically. All you have to do is look; there is quite a supply.

Larger company boards, with a tendency to look for CEOs, must get out of that habit; there are very few CEOs who are not white males. CEOs are over-shopped and women and minorities of great skill are “under shopped” when it comes to board invitations. Since activist investors are hunting for weak boards of directors at all levels, not just the largest of companies, it is important for boards to find the right people with the right skill sets and the right chemistry.

Finally, what about age and term limits? You don’t want to lose institutional memory, but you need to have age diversity. One idea: look at the average age and tenure of your board, don’t apply an age/tenure screen on any given individual. One panelist called this an “age/length of service matrix.”

Whoops– sorry, Mr and Mrs Price

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Did you ever stick your foot so deep in your mouth that it took major surgery to extract it?

After the Red Sox opening day game, at which our new Ace, David Price, and our new prime reliever, each gave up three run homers (Sox lost to the Orioles), my wife and I stopped into one of our favorite restaurants for a bite to eat and to let the crowds subside.  Seated next to another couple who clearly had attended the game, I mouthed off about how we spent a zillion dollars and nonetheless this guy Price had stunk up Fenway Park.

Later in the conversation, Laura noted the Southern accents and asked where the other couple were from.  Tennessee, we were told.  Just up for the game, we asked.  Oh yes, they replied; we always travel to see our son David pitch.

David Price’s mom Debbie was most cordial about it.  The dad?  Well he shook my hand but I do think he would have preferred to not have.

Ouch.

Where’s the Money for Drug Development?

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Emerging life science companies always need money. Some seek non-dilutive money through research grants, government programs and the like. Others deal with angels and seed round and Round A investors.

Another source of possible funding, often over-looked, can be afforded through major drug and pharmaceutical companies. For example:

Johnson & Johnson has opened a facility in Cambridge (the geography is of course no surprise), which has a large investment fund, as well as access to incubator space (the space is at market rate).

Roche, similarly in Cambridge, has several programs; one is an investment arm but there are a couple of programs for fundamentally innovative technologies which are still primarily rooted in academia; they are willing, without equity claim, to support promising science on behalf of scientists still embedded in an academic setting.

The large and privately-held pharmaceutical company Boehringer Ingelheim has programs in Cambridge not only for investment but also for counselling companies and investors seeking to navigate working with larger pharmas.

Of course each company has its preferred technological targets, so approaches must be tailored. However, given the huge shift in emphasis away from drug development and internal innovation, to reliance on outside innovation, it is logical for these larger companies to nurture the external ecosystem. For example, at J&J in 2002 external drug development accounted for 20% of new products while in 2012 (last reporting year) it accounted for 50%; the statistics for the top ten pharmas are 16% and 33% respectively; at Roche 35% of all sales are based upon externally developed products.

About Ovaries

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The science of in vitro fertilization (IVF) has not advanced much in the last 20 years, but a small public company is trying to change all that. A presentation by the CFO of OvaScience, to a Thursday morning meeting of the Boston Chapter of the Association for Corporate Growth, described innovative programs in place or in development to improve the surprisingly low success rate of such procedures.

First, some statistical orientation. World-wide, 40,000,000 women per year seek medical advice and treatment for fertility issues. Of those, something under 2,000,000 per year undergo IVF (2012 statistic). Surprisingly, only about 11% or 12% of that number is in North America; the largest gross market is in Europe, and the largest single market is in Japan.

Fertility falls off rapidly in the 30s, and is really low by the time a woman turns 40. The success of IVF in this population is generally in the upper 20% range, although Japan for a variety of reasons is in the 17% to 18% range (perhaps because women tend to work longer there and start families later).

OvaScience is operating in 6 countries (not the United States) utilizing technologies which work only by utilization of a woman’s own body. The currently operant procedure is to augment the health of an older woman’s egg cells by extracting mitochondria from cells in the ovarian wall (cortex) and injecting it into active eggs within the ovary itself; mitochondria is sometimes described as the “engine” which provides energy to a given cell.

Future therapies being explored include replanting young cells in their entity from the cortex into the center of the ovary, and growing eggs from the cortex entirely in vitro (outside the human body).

Why no operations in the United States? While there are some regulatory issues involving, inevitably, the FDA (which unlike other countries does not have a dedicated function to fertility), the largest reason is “religious objection.”

CEOs and Presidential Elections

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Election years cause many CEOs to constrict their corporate plans.  It happens every Presidential election year.  It is most manifest among Republican CEOs.  It is not necessarily the most benign development for the health of the business.

This insight comes courtesy of Tom Sherwin, who ought to know; he is principal of CEO Resources, a firm devoted to coaching CEOs and with clients both in Massachusetts and nationally.  Is this generalization supportable, I had the temerity to ask over a pleasant lunch today?  Seems Tom’s office went back to check his own firm’s business level in election years.  Dips in his consulting business for his regular clients, reflecting corporate inaction, occurred during each Presidential election year; a spurt of activity followed, starting right after the election without regard to the prevailing party, including unleashing of long-discussed plans which were put on hold during the course of the election season.

Tom pointed out that he does not discuss politics with clients, it is not his business.  But the business dynamic is something he may counsel about, as it is predictable and seemingly not wholly dependent on the candidates or issues of the day.

Not often you learn something new and interesting and systemic at lunch.