Baker's Choice: June 2011

With summer vacation beckoning, it's a good time to pause and look back on the first six months of 2011. If you’re like us, you’ve seen a welcome pick-up in deal activity lately. For L&B, increased deal flow – M&A, private equity financings, IPOs – means doors open and close (often at the same time!) for our clients. Given the recent trend to pick up individual talent through corporate acquisition, Rick and I thought this would be a good time for a special e-letter edition focusing on the pleasures – and pitfalls– of executive transition

We start with an update on the potential employment law impact of AT&T Mobility v. Concepcion, the recent US Supreme Court case denying consumers a right to class action arbitration. Then, a few notes on what we’re currently seeing in our practice, with links to more in-depth discussions on the underlying issues.

• Update: The Continuing Rise of Private Justice: As most of you know, we’re not necessarily fans of pre-dispute arbitration clauses in employment agreements because in our experience, such agreements are not freely negotiated and are inherently unfair for a variety of reasons – not the least of which is that individuals (unlike their corporate employers) are generally at a financial disadvantage when it comes to paying for the best private justice money can buy. The California courts have devised safeguards against this problem, but the recent U.S. Supreme Court case, AT&T Mobility v. Concepcion, raises the very real possibility that such protections may not long survive for California employees. We've written an article summarizing the AT&T Mobility decision and analyzing its impact on the landmark California decision in Armendariz. An interesting side note: check out New York's "judge-directed negotiation" program, which (ironically) attempts to make private justice-style mediation available to the public. It's a topsy turvy world.

Now, on to what's coming through our doors:

• Executive Teams in M&A: The working group list is filled with lawyers: in-house counsel, outside company counsel, acquirer counsel, investor counsel. . . but who’s watching out for the founders and the executive team? Target company executives face a gauntlet of compex legal and practical concerns in connection with any change in control, starting with their rights in the deal itself and leading inevitably to employment decisions before and after the close. Ideally, we’re called in early enough to ensure that our clients’ individual rights (particularly with respect to equity and continuing employment) don’t get lost in the initial excitement of the prospect. More often than not, however, the term sheet has been signed and the purchase documents drafted by the time L&B gets the call to represent the team. No matter when we get there, our job is the same: make sure our clients are protected while not holding up the action! It’s a delicate--but absolutely essential--balancing act, since the typical M&A deal raises issues for key executives around employment agreements (severance, incentive and retention), equity compensation, “golden parachute” tax payments and waivers, and deferred compensation structures. Founders may also layer on concerns related to the overall purchase, escrow and shareholder agreements (including noncompetes). And specific equity sweeteners or payment triggers will need special attention to ensure they are respected (or preserved) during the negotiations.
  


• Post-M&A Termination Issues: The deal is inked, employment contracts signed, equity assumed or cashed out. . . . hopefully everyone lives happily ever after and no one ever looks at the agreements again. Of course in the real world nothing – especially the role of a key executive – stays the same after an acquisition. Have all of the promises made in the deal been fulfilled? What are the warning signs that new management is looking for a way out of an employment contract? When does a slow but steady erosion of responsibility become a constructive (or “good reason”) termination? And what’s the right way to resolve unmet expectations: behind-the-scenes negotiation, third party mediation or formal dispute resolution process? There’s a different answer for every situation. Our most time-tested advice: pay careful attention to signs the world is changing around you, and get counsel on how to proceed before anything definitive happens.
  


• Pre-Employment Negotiations: A couple in love are rarely comfortable discussing a pre-nup on the eve of the wedding. Similarly, enthusiastic job-seekers sometimes shy away from thinking about the end of the road while pursuing (or being pursued by) a hot new employment opportunity. But one thing is certain: sooner or later that hot job will terminate (and in the tech sector, it’s often sooner). In our experience it takes just one unprotected termination for most executives to realize that they should have read the fine print before they said “I do.” Prospective employers – and their counsel –give a great deal of thought to the divorce scenario and most boilerplate employment documentation is packed with terms sharply slanted in the employer’s favor. Sometimes there’s nothing to be done about these terms, but our talented clients with unique value (and multiple employment alternatives) are in a position to negotiate. In addition to the obvious (compensation, severance), executives need to pay particular attention to provisions that define different types of termination, as well as provisions governing dispute resolution, whether in a termination context or otherwise. Dispute resolution provisions can often be what we lawyers call “outcome determinative.” Arbitration agreements are more dangerous than ever from the employee’s perspective, and recent court decisions like Concepcion promise to make them more dangerous still. Arbitration, forum-selection and choice of law clauses must be well understood from the get-go to avoid surprises down the road. This problem comes up so frequently that we’ve posted a short practice piece that lays out the issues for you.
  


• Employer Confidentiality Requirements: Employers – particularly tech employers in competitive markets – are deadly serious about enforcing confidentiality requirements these days. One sobering example of this was last year's "English Muffin Case", where a former top executive of the bakery that produced Thomas' English muffins was enjoined from taking a job with Hostess because he knew too much about those "nooks and crannies." We’ve seen a shocking number of highly compensated, generally sophisticated and fairly senior employees in transition stumble in this area lately, inadvertently putting themselves in a position to be accused of misappropriating former employers’ confidential information. Departing employees who wish to keep a record of their achievements sometimes download work product, numerical measures of results, or contact lists (even entire email records). It’s far easier to leave with this sort of material than it was in the days when one had to stuff a briefcase with paper; it’s also far easier for an employer to electronically track down the employee who does it. The consequences for some execs have included lawsuits and/or termination from their new positions after demands by their former employers to their new employers. We advise executives in transition to get counsel before the change to avoid making costly mistakes – not just in money, but in lost opportunity.

As always, feel free to call either Rick or me (at 415-391-2995) to discuss any of the above. Have a wonderful summer!