| Date: | 10/27/1986 |
|---|---|
| Organization: | State Ethics Commission |
A former state agency division director is not prohibited under §5 of the conflict of interest law from representing someone in connection with that sale of corporate stock from one founder to another where the former state employee signed the escrow agreement to register the stock on behalf of the division because the sale of the stock is not in connection with the escrow agreement.
You were the Director of a Division ("Division") of the a state agency until March, 1986. While you were the Division Director, you signed an escrow agreement which was negotiated by a member of your staff with X Company prior to its registration of its securities with the Division. The other parties to the agreement were the escrow agent and the two corporate founders. The Director may require an escrow agreement as a condition for registering a corporation's public offering of stocks. Cited law. The requirement for an escrow agreement is not common and is employed when the Division determines, following a review of the company's prospectus and other information, that the offering may work a fraud on potential investors. An escrow agreement usually restricts the holders of "cheap stock" (such as corporate founders) from any sale or disposition of such stock for a period of one year or longer. Cited law. The purpose of the escrow agreement is to place the corporate founders' stock, purchased at a low price, in escrow for a specified period of time to prevent a devaluation of investors' stocks and to prevent the founder from leaving the company without leadership.
The purpose of the agreement was to tie up the founders' stock for a minimum of two years and a maximum of five years, in addition to linking the agreement to a specific earnings ratio so that the founders would not unfairly benefit from the investors' capital. The agreement contains a clause which allows the founders to sell or give their escrowed shares to each other or to their families as long as the shares remain subject to the terms and conditions of the agreement. In essence, as long as the agreement remains in effect, the escrowed shares may not be sold to the general public. In addition, any transferee of shares under this clause who is not a party to the agreement must execute a declaration, satisfactory to the Director, making any such transferee a party to the agreement. Further, the declaration must be submitted to the Director and escrow agent at the time of the transfer.
The Division is a signatory to the agreement and retains the authority to enforce the provisions of the agreement. In the event that the holders of the escrowed shares wish to petition for an early release from the conditions of the agreement, such a request would be made to the Director. The Director would determine whether the company has met specific earnings requirements, whether changed circumstances or any other reason would be sufficient to terminate, revoke, rescind, modify or release any terms of the agreement.
Does G.L. c. 268A permit you to represent one of the corporate founders in a possible buyout of the other founder?
Yes, subject to the following conditions.
As the former Director of the Division, you are a "former state employee" for the purposes of G.L. c. 268A. Section 5(a) of G.L. c. 268A prohibits a former state employee from acting as an agent or attorney for, or receiving compensation from, anyone other than the commonwealth or a state agency in connection with any particular matter in which the commonwealth or a state agency is a party or has a direct and substantial interest and in which he participated as a state employee. Under § 5(a) you may therefore not act as an attorney for anyone other than the state in relation to any particular matter in which you previously participated as Division Director. G.L. c. 268A, § 1(k) defines "particular matter" as "any judicial or other proceeding, application, submission, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest, decision, determination, finding. - - ." An escrow agreement is a contract and thus is a particular matter. Participation is defined in G.L. c. 268A, § 1(j) as "participate in agency action or in a particular matter personally and substantially as a state, county or municipal employee, through approval, disapproval, decision, recommendation, the rendering of advice, investigation or otherwise." Your participation in the escrow agreement consisted of your signing the agreement as Division Director and, in effect, becoming a party to the agreement and executing it. The signing of the escrow agreement paved the way for the company's stock registration. If the agreement had not been signed, the registration may not have occurred. Cited law. Therefore, your signing constituted personal and substantial participation in the agreement. See, EC-COI-83-114. Even though a member of your staff negotiated the agreement, it does not minimize the fact that you also participated in the agreement. More than one person may participate in a particular matter.
Since you participated in the agreement, you are prohibited from acting as an attorney for any private party in relation to: any challenge to the validity of the agreement; any petition for a release, modification, rescission or revocation of any terms of the agreement; any action brought by the Division or any party in interest to enforce any provision of the agreement, and any clause of the agreement which requires the Division's review and/or approval. On the other hand, you may represent one founder who wishes to buy out the other founder in a consensual transaction. The fact that founders are authorized by the agreement to sell or exchange shares with each other during the escrow period does not mean that the sale or exchange is "in connection with" the agreement. Cf. EC-COI-82-25. The founder's sale, which is consensual, is a private transaction which does not require Division review or approval, or place the Division in a position of being a party or a party in interest to any future litigation concerning the agreement.[1] As long as the transaction remains independent of the Division's review or approval, you may therefore represent a founder in the transaction without violating § 5(a).
End Of Decision
