Facts
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You were recently appointed as the Secretary of Transportation and Construction. You have undertaken to divest yourself of two business activities which are "doing business with state agencies coming within the purview" of your new office. You describe the business relationships as follows:
1. Transit Retail Partnership, Inc. (TRPI)
A. Description of Business Activity
TRPI entered into a Master Lease Agreement with the Massachusetts Bay Transportation Authority (MBTA) on May 23, 1989. The Master Lease Agreement is in effect for an initial term of 15 years and 6 months and generally grants to TRPI the right to use and sublease for retail and commercial purposes space located at various stations on the MBTA's Orange Line. The Master Lease Agreement was awarded to TRPI after public notice and a competitive bidding process long prior to your consideration for, or appointment to, the position of Secretary of Transportation and Construction.
B. Description of Ownership Interest
Prior to your appointment to the position of Secretary of Transportation and Construction, you were President and a member of the Board of Directors of TRPI. You were also a holder of 40% of the issued and outstanding capital stock of TRPI and a personal guarantor (along with the two other stockholders of TRPI) of rent arrearages due from time to time to the MBTA under the Master Lease Agreement. Under Section 16(a) of the Master Lease Agreement, TRPI may not, without the prior written consent of the MBTA, permit a voluntary transfer of any beneficial interest in TRPI.
C. Proposed Plan of Divestiture
You have proposed to divest this interest in TRPI within 30 days by (i) immediately resigning from the Board of Directors and the office of President of TRPI, (ii) selling all of your stock in TRPI to a present stockholder of that company for the current fair market value of such stock as determined by a mutually-selected, independent business appraiser and (iii) seeking the consent of the MBTA to the cancellation and withdrawal of your personal guarantee under the Master Lease Agreement. In considering the foregoing plan of divestiture, you inform us that the proposed transferee is not a member of your immediate family and that any dealings between you and such transferee have been (and will be at all times throughout the transaction) at arms' length. In addition, it is possible that an independent financial appraisal of TRPI could result in a negative present value for ascertaining the value of your stock. In such event, the parties may consider the issuance of a promissory note by you to account for such determination. If issued, the principal amount of such promissory note would be set at a sum certain fixed at the time of your transfer of stock.
D. Removal from MBTA Deliberations Concerning Assignment of Interest
In order to complete the foregoing plan of divestiture, the MBTA will be asked to provide its
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consent to (i) the withdrawal and cancellation of your personal guarantee under the Master Lease Agreement and (ii) the transfer of your stock in TRPI. As a related matter, we understand that the MBTA has asserted that TRPI is in arrears under the Master Lease Agreement. You and TRPI have disputed such assertion based upon the advancement of funds by TRPI to improve the premises under the lease, which, according to TRPI should be offset against payments due under the Master Lease Agreement. Although there is not an "arbitration clause" in the Master Lease Agreement contemplating the resolution of such disputes by a mutually-selected, independent arbitrator, we understand that the MBTA is considering the proposal of such a procedure for the resolution of the present problem. This can be accomplished by the written consent of the MBTA and TRPI. The length of time possibly needed to arbitrate this matter is not clear at this time.
You have stated that you will not participate in, or be permitted to review any correspondence or internal memoranda concerning, deliberations of the MBTA relating to the grant of a consent to the transfer of TRPI stock, the resolution of the rent dispute under the Master Lease Agreement, or the cancellation and withdrawal of your personal guarantee, pursuant to s.6 of M.G.L. c. 268A.
2. Alewife Commercial Associates, Inc. (ACAI)
A. Description of Business Activity
ACAI entered into a Lease Agreement with the MBTA on June 3, 1988. The Lease Agreement is in effect for an initial term of 10 years and 6 months and generally grants to ACAI the right to use and sublease for commercial and retail purposes space located at the MBTA Alewife Station/Garage Complex in Cambridge, Massachusetts. The Lease Agreement was awarded to ACAI after public notice and a competitive bidding process long prior to your consideration for, or appointment to, the position of Secretary of Transportation and Construction.
B. Description of Ownership Interest
Prior to your appointment to the position of Secretary of Transportation and Construction, you were President and a member of the Board of Directors of ACAI, and a holder of 50% of the issued and outstanding capital stock of ACAI. Under Section 16(a) of the Lease Agreement, ACAI may not, without the prior written consent of the MBTA, permit a voluntary transfer of any beneficial interest in ACAI.
C. Proposed Plan of Divestiture
You have proposed to divest your interest in ACAI within 30 days by (i) immediately resigning from the Board of Directors and the office of President of ACAI, (ii) selling all of your stock in ACAI to a third party for the current fair market value of such stock as determined by a mutually-selected, independent business appraiser. There are no personal guarantees outstanding under the Lease Agreement and, to your knowledge, there are no material disputes concerning past due rents under the Lease Agreement.
In considering the foregoing plan of divestiture, you inform us that the proposed transferee of your stock is not a member of your immediate family and that any dealings between you and such transferee have been (and will be at all times throughout the transaction) at arms' length. In addition, it is possible that an independent financial appraisal of ACAI could result in a negative present value for ascertaining the value of your stock. In such event, the parties may consider the issuance of a promissory note by you to account for such determination. If issued, the principal amount of such promissory note would be set at a sum certain fixed at the time of your transfer of stock.
D. Removal from MBTA Deliberations Concerning Assignment of Interest
In order to complete the foregoing plan of divestiture, the MBTA will be asked to provide its consent to the transfer of your stock in ACAI as set forth above. As with any deliberations concerning TRPI, you have stated that you will not participate in, or be permitted to review correspondence or internal memoranda concerning, deliberations of the MBTA relating to your request for a consent as herein described, pursuant to M.G.L. c. 268A, s.6.
Prior to taking office in January, 1991, you entered into an agreement with an independent third party to purchase your interests in TRPI and ACAI. A process was set to determine the value of those interests at that time.
You have already resigned from the Board of Directors and Office of President of each of TRPI and ACAI. Consequently, you are no longer involved in the management of the affairs of these corporations.[1] It is your current understanding and belief that the remaining officers and directors of TRPI and ACAI will not permit you to transfer your shares in these entities to the independent third party without first offering such shares back to TRPI and ACAI in accordance with Article V of the respective Articles of Organization of these two corporations (the "Charter Restrictions").
By their respective terms, the Charter Restrictions require at least a 30-day consideration period by each of TRPI and ACAI before their directors must decide whether to purchase your shares in accordance with your third party offer, reject the offer outright, or reject the offer and exercise a right of arbitration to determine the value to be paid for the shares. In the event either or both of TRPI and ACAI elect to exercise the right of arbitration under the Charter Restrictions, you will be unable to transfer your shares within the 30-day divestment period as set forth in s.7 of c. 268A.
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Although the exact time frame for completing the arbitration process is unknown, it is unlikely to be resolvable within the next month.
Question
Given the above facts, must the divestment requirements of G.L. c. 268A, s.7(a) be completed within 30 days?
Answer
Based upon the above, including the apparent good faith attempt to divest of the prohibited interest within 30 days pursuant to s.7(a) and the fact that legal constraints will prevent complete divestment within that time period, a period longer than 30 days to complete divestment is warranted, subject to certain conditions
Discussion
Section 7 of c. 268A prohibits a state employee from having a direct or indirect financial interest in a contract made by a state agency in which the Commonwealth or a state agency is an interested party. The restrictions of s.7 will not apply, however, to a state employee who, in good faith and within thirty days after he learns of an actual or prospective violation of the section, makes a full disclosure of his financial interests to the contracting agency and terminates or disposes of the interest. G.L. c. 268A, s.7(a).
The theory on which a violation of s.7 is premised is clear:
Section 7 announces a rule the basis of which is that, if no exemption is applicable, any state employee is in a position to influence the awarding of contracts by any state agency in a way which may be financially beneficial to himself. In a sense, the rule is a prophylactic one. Because it is impossible to articulate a standard by which one can distinguish between employees in a position to influence and those who are not, all will be treated as if they have influence ... But it may be possible, in at least some instances, to implement such a theory of the section with selective rapier thrusts where needed, rather than indiscriminate sledgehammer blows on any employee who is caught in the area.
Buss, The Massachusetts Conflict of Interest Statute: An Analysis, 45 B.U. L. Rev. 299, 374 (1965); see also, EC-COI-84-105.
This Commission has always proceeded on the theory that the conflict of interest statute must be given a workable and flexible meaning. See, Graham v. McGrail, 370 Mass. 133, 140 (1976) (flexibility on certain of the restrictions of s.19 was warranted); EC-COI-87-19 (s.14 - the county counterpart to s.7 - must be given a workable and common sense meaning); 87-29 (permitting the receipt of deferred income which would otherwise be a violation of s.7). The Commission has also determined on several separate occasions that even the broad preventative purposes of s.7 are flexible enough to permit some time period of divestment which is greater than the 30-day period set out in s.7(a) when circumstances have warranted. See, EC-COI-84-109; 84-105; 82-12; 81-189. However, each of these prior opinions involved housing and rental subsidies paid to the state employee. In each case, the Commission held that, in an effort to avoid undue hardship to innocent third parties, the restrictions of s.7 could be delayed until such time as the contractual or other legal arrangements fully ran their course, notwithstanding the fact that the state employee continued to benefit from a prohibited s.7 interest.
In the present case, you have informed us that you have undertaken a number of steps to divest of the interests since taking office. For example, you have resigned all of your positions in the private entities in question and have complied with the s.6 disclosure/abstention requirements. In addition, by entering into an agreement to sell your interests in TRPI and ACAI, you have attempted to start the divestment process as soon as possible.
That the respective boards of TRPI and ACAI may now invoke the time-consuming Charter Restriction process, to which they are legally entitled, should not hinder your good faith efforts to comply with s.7.
Accordingly, given (i) your apparent good faith efforts, before and after taking office, to fully understand and comply with the requirements of s.7; (ii) the necessity of complying with the Charter Restrictions (a legal process outside of your control) in order to complete the divestment process;[2] and (iii) that these interests arose prior to your taking office, the Commission finds that additional time is warranted in this case to avoid undue hardship, even though no innocent third parties are involved.
Although you may have such additional time as is necessary for the Charter Restriction process to run its course,[3] s.7 will not permit you to benefit financially from having held an interest in prohibited s.7 contracts. In other words, the value you ultimately receive for your shares in TRPI and ACAI, respectively, cannot be greater than (i) the value derived from the third party agreement entered into before you took office, but set as of a date not later than January 3, 1991,[4] or (ii) in the actual event the arbitration process is triggered, the value of such shares as determined as of January 3, 1991 through the arbitration process.[5] By capping the value of the shares, in advance and at these pre-determinable amounts, you would not be receiving any financial gain as a result of the prohibited s.7 interests. This is consistent with prior Commission precedent. For example, this Commission has permitted a state employee to continue to be affiliated with a private entity which was a party to state contracts,
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provided that the state employee received no financial interest from those contracts. EC-COI-89-5 (any income derived from the prohibited contracts must be "segregated" so that the state employee would receive no financial benefit from them). In addition, EC-COI-87-29 held that the deferred receipt of otherwise prohibited s.7 income, earned and "capped" prior to taking office, even if paid after the employee begins his state job, is permissible. This result was based upon the theory that newly appointed state employees may not practically be able to receive the complete payment of fees owed as of their final date of work. It would be unreasonable to place such newly appointed state employees in immediate violation of s.s.4 or 7 merely because of a compensation timing which they do not control. Id.
In effect, the "cap" mechanism set out above is similar to the "segregation" mechanism of EC-COI-89-5 and the deferred income mechanism of 87-29 because your interests would not benefit as a result of any state contract during the time you have been in office. So long as the divestment process continues in good faith, the mere holding of the interests in question will not violate s.7 if the value of those interests will not increase beyond the "capped" rate if determined as of an earlier date.[6] See also, EC-COI-89-14 (the liquidation of a prohibited interest must be based upon a currently appraised value, not on a post-transfer valuation - in effect, setting a "cap" on the value). You have already informed us that you agree to the imposition of the cap and that you will move as quickly as possible to complete the divestment process in accordance with the requirements of s.7 and this formal opinion. In addition to the above, you must keep this Commission informed on a monthly basis as to the status of the divestment process until such time as the divestment has been completed. This status report will enable the Commission to monitor whether the process is proceeding in accordance with the requirements of s.7 and this formal opinion.
We also advise you that an additional disclosure pursuant to s.23(b)(3) of c. 268A to Governor Weld, as your appointing authority, is appropriate in order to keep the Governor fully apprised of the potential rent dispute between the MBTA and TRPI, and of the continuing personal guarantees. Section 23(b)(3) prohibits a state employee from acting in a manner which would cause a reasonable person, having knowledge of the relevant circumstances, to conclude that any person can improperly influence or unduly enjoy his favor in the performance of his official duties, or that he is likely to act or fail to act as a result of kinship, rank, position or undue influence of any party or person.
Section 23(b)(3) provides, however, that a full written disclosure of all of the relevant facts to the employee's appointing authority will dispel the "appearance" of any conflict of interest. See, e.g., In the Matter of George Keverian, 1990 SEC 460.
This disclosure is necessary in your case because you would normally continue to have official dealings with the MBTA, its directors, and staff, while the dispute and the personal guarantees are on-going. This disclosure will provide Governor Weld with the opportunity to decide whether additional safeguards are warranted. For example, the Governor might want to consider whether your official duties under M.G.L. c. 161A, s.6 as Chairman of the Board of the MBTA, should or could be delegated to others while the potential dispute and/or the personal guarantees remain in effect.
