Mergers and Acquisitions Strategy and Execution: A Cloud-Based Solution

Uniddo logoI’m pleased to announce that I’ve joined the advisory board of Uniddo, Inc. Uniddo  (pronounced you-ni-DUE) is a start-up developing a cloud-based solution for mergers and acquisitions strategy and execution.  The system will cover the M&A process from soup to nuts, from strategy development and pipeline management to post-merger integration.  Its goal is to provide expert guidance, project management and data management across the entire multidisciplinary M&A team.  People in other kinds of deals could eventually use some of the execution-stage modules, too.  For example, the due diligence piece would be a great tool for securities and venture capital lawyers to manage the process and mitigate risk.  Interested to see how it develops.

Time to Change Your NDAs: The Defend Trade Secrets Act of 2016

Time to Change Your NDAs:  The Defend Trade Secrets Act of 2016

business, office, law and legal concept - picture of man and womThe US federal Defend Trade Secrets Act of 2016 was signed into law in May.  It brings more consistency to the hodgepodge of statutes and case law surrounding the misappropriation of trade secrets and offers new rights and remedies to those who seek to defend their intellectual property rights.  The immediate impact on most businesses will be to the documents they use to manage their trade secrets, particularly those they use for employees and independent contractors.As an initial suggestion, until further case law and best practices develop, I suggest that companies consider the following changes to their standard documents:

  1. The DTSA generally follows definitions like “trade secret,” “misappropriation” and “improper means” from the Uniform Trade Secrets Act that serves as the basis for state trade secret law in much of the country. However, Massachusetts and New York have not adopted the UTSA.  Be sure agreements that use defined terms for these concepts track the new definitions in a way that also reflects the relevant state law definitions.  Note that the term “improper means” expressly excludes reverse engineering, so companies should be sure their agreements still contain appropriate protections.
  1. Certain kinds of damages are not available under contracts and agreements entered into after the statute went into effect unless DTSA language is added. Agreements with individuals that govern the use of trade secrets or other confidential information should include a disclaimer like the following, modified to fit the particular agreement:

“Notwithstanding anything contained herein to the contrary, to the extent provided in the Defend Trade Secrets Act of 2016, (i) individuals may not be held criminally or civilly liable under any Federal or State trade secret law for certain disclosures made in confidence solely for the purpose of reporting or investigating a suspected violation of law or otherwise in a lawsuit; and (ii) certain disclosures may be made by individuals who file a lawsuit for retaliation by an employer for reporting a suspected violation of law.”

An employer may include this kind of disclosure in employee handbooks or other policy documents as long as it provides a cross-reference to a reporting policy for a suspected violation of law.

  1. Most contracts have clauses about the forum for resolving disputes. While some employers prefer arbitration, many agreements instead provide that all claims arising under the agreement must be resolved in court.  The DTSA makes a technical change to case law limitations on the jurisdiction of federal courts to hear certain state law claims.   Agreements that refer only to state courts should therefore be revised to give employers the right to seek remedies in federal court as well. This way, employers can pursue claims under both federal and state law at the same time without having to navigate quite as complex a procedural minefield.
  1. Almost all confidentiality and intellectual property protection agreements include an acknowledgment of some of the elements a court would consider in granting an injunction, like monetary damages not being a sufficient remedy for breach. The DTSA goes even further than injunctions. Under extraordinary circumstances, it gives a court the power to authorize ex parte seizure of material containing trade secrets to prevent its dissemination (that is, seizure during the pendency of a case without prior notice to the party whose property is being seized).  Courts can appoint a special master to oversee the investigation and seizure and can even authorize law enforcement to participate. Employers should consider adding language to agreements with employees who have access to key trade secrets that an injunction would not be a sufficient remedy and that the employee consents to exparte relief under the circumstances described in the statute.It is not yet clear how effective this kind of language will be, but we can expect much litigation about the whole topic.
  1. Speaking of injunctions, the DTSA generally does not expand state law rights to injunctive relief or otherwise preempt state law. Separate DTSA injunctions must be based on “evidence of threatened misappropriation,” a much higher standard than an employee’s simply knowing a trade sec  The choice of state law governing the contract is therefore just as important as it has been.  Courts typically apply the law of the employee’s home base, but for employers with multistate contacts it may make sense to review the choice of law provision to see if there are enforceable options.
  1. Commentary on the DTSA so far has mostly focused on employees and independent contractors. However, businesses can also use DTSA in other contexts to protect their tradesecrets.  For instance, companies that make disclosures to prospective investors or acquirorsshould consider using nondisclosure agreements that require parties receiving company information to include DTSA-like provisions in agreements with their own employees and independent contractors.

The first cases were filed under the DTSA within days of its enactment.  It is not clear how successful they will be since claims have to relate at least in part to the misuse of trade secrets after the effective date of the statute.  However, since the cases do show that the national landscape is moving quickly toward new focus on the statute,businesses should consider protecting their competitive positionsnow by making changes to their confidentiality and intellectual property protection agreements, employee handbooks and other published policies.

How to Divide Law Firm Partnership Income

One of the quickest ways to silence a roomful of lawyers is to raise the question of how to divide law firm partnership income. Many lawyers are reluctant to discuss the subject because they are unfamiliar with the options and uncertain how to select among them. Others are concerned that a conversation with their partners about compensation splits will be too uncomfortable. The good news is that there are there are enough different ways to slice the pie for each viable firm to be able to find a solution that works. Also, as with other partnership agreements, the conversation becomes much easier if it starts with what kind of culture and behavior the partners want to encourage rather than with money. The actual numbers flow more easily once the goals are clear.

The major variations are as follows:

1. It’s Good to Be King. One lawyer is the name behind the firm. He originates many of the clients by virtue of his prowess, reputation or connections. All the others bask in his reflected glory. He gets to look over the books and decide how much the other partners should be making based on subjective or objective criteria. He may not disclose all of what those criteria are. However, most people see the fairness of his decisions. There is enough money coming in to keep most of the people happy most of the time. The incentive is to keep the king happy.

2. The Gang of Four. Instead of having one king, a group of lawyers forms a committee to decide how to split the income for the rest of the partners. At some larger firms, the compensation committee is separate from the executive committee that runs the firm. At others, the compensation committee makes a non-binding recommendation to the executive committee. At still others, it is the same committee. Although the committee likely has to publicize some of the factors on which it makes its decision, the other partners often become supplicants who write up an annual impassioned summary of achievements and predictions for the committee. This structure works if people trust in the process and the people on the committee. The incentive is to shoot for the targets the Gang of Four makes public and to make sure everyone in the Gang likes you.

3. The Black Box. The Black Box is a variation of The Gang of Four, except that the criteria are entirely subjective. It may work if there is enough money to go around, but the problem is that lawyers, like everyone else, often compare themselves to their peers. The subjective element creates a huge potential for perceived unfairness, which can cause rifts in the firm. The incentive is to work hard and play office politics.

4. Eat What You Kill. The EWYK model appeals to the strong strain of individualism in Western culture, and American culture in particular. The theory is that each member of the firm is the captain of her own destiny, can choose how much to work in any given period and should be rewarded for her efforts. It is a very common structure among smaller firms, but tends to go by the wayside as firms grow. The behavior it incentivizes is the sharing of space and administrative resources, individual responsibility, the development of individual practices and a sense of independence. It can also encourage divas. It does not encourage other benefits of being in a firm, such as cross-selling to specialists within the firm, a team-based approach that becomes necessary as matters become more complex and multidisciplinary, the sharing of knowledge, the development of associates coming up through the ranks and, perhaps most importantly, balancing out the strength of individual practices on a year by year basis. A lawyer might have a bad year followed by a good year, while another has a good year then a bad year: the EWYK model does not let them smooth out the cash flow. Finally, the incentive to develop a sense of community within the firm is not emphasized, which means that lawyers feel less incentive to stay. When they leave, they take “their” clients, who have never developed a relationship with others in the firm. Nonetheless, many smaller firms with practices that do not require extensive teamwork find the clarity of the approach appealing.

5. The Formula. The Formula takes the overall firm revenue and plugs in percentage values for factors that may include some or all of (a) length of service, (b) client or matter origination, (c) ongoing relationship management (in case clients get handed over from one lawyer to another), (d) billing responsibility for a matter (which may be separate from relationship management), (e) time spent servicing clients, (f) management and administrative time, (g) special projects or other incentives, (h) total hours billed, (i) prospects for the coming year (especially if there are client payments that will straddle the fiscal year-end, as in corporate matters that get billed at the end of the transaction or contingent fee matters) and (j) other creative elements. The advantage is that if everyone knows The Formula, it reduces the chance that people will see distributions for a particular year as being unfair. It sets the incentives. If structured properly, it encourages the kind of internal cooperation that is good for the firm’s longevity, which is why it is common throughout the service sector. The disadvantage is that a mechanical formula removes business flexibility and encourages people to structure their practice in ways the framers may not have intended. For instance, big corporate transactions can be very lucrative, but a formula that focuses entirely on collections may encourage business lawyers to move to firms that give them more steady current income rather than periodic bonuses when transactions close.

6. Solomon’s Baby. Outside of the law firm world, many people who own partnerships expect a fixed percentage of the profits, like dividends from shares of a corporation. Law firms have two variations:

  • Lock-step compensation, in which everyone in the same year of partnership is paid the same, was the gold standard for generations. Not so today. It requires a huge amount of trust that each member will pull his or her own weight, make up for down years with future up years, get paid less in up years than might be possible elsewhere to even things out or out of a sense of community, and stay with the firm. It requires and encourages teamwork and long term planning, and reduces internal conflict over pay.
  • Some smaller firms have fixed distributions that reflect the perceived relative contributions of the partners. Often, they are based on circumstances at the time the firm is formed and may seem imbalanced as time goes on. The imbalance often fractures firms that do not have a mechanism to revisit fixed percentages as practices develop over time.

7. The Reference Standard. In baseball, even the greenest Major League player is entitled to be paid a minimum salary. Law firms sometimes do the same, with each member of the firm being entitled to receive some minimum compensation. For instance, some firms have decided that no partner should receive less than the highest paid associate. Others use a similar method to calculate retirement or buyout distributions.

8. The Bleacher Seats. Since the 1980s, more and more firms have been moving toward a tiered partnership structure. The tiers are divided differently in different firms, but many contain a tier of “non-equity partners.” These partners may hold themselves out as partners to the outside world, but really receive a salary plus bonus based on individual performance and have varying degrees of tenure (some of the many flavors of being “of counsel” overlap with being a “non-equity partner”). The next tier may be paid on a formula that combines a smaller fixed amount plus a percentage of the firm’s net income or divides a set percentage of firm profits among all partners in that class. The top tier is often paid on more of a percentage basis divided using one of the approaches outlined above. The assumption is generally that total compensation – and risk – increases as one climbs the tiers. Firms use a tiered structure to manage expectations and attorney development and to maintain firm financial health. Some firms have a policy of moving non-equity partners out the door if they do not advance within a certain period of time. Other firms use the incentive structure to focus non-equity partners on client origination, which may come at the cost of servicing existing firm clients. Rightly or wrongly, many perceive non-equity partners as being like tenured associates who can only advance if the firm fears they will walk away – meaning that they have developed invaluable expertise or a separate, portable client base. As long as the firm stays on top of how its attorneys are developing, though, this system works well enough that most of the nation’s largest firms have adopted one or another variation of it.

There is no one “best” way to divide law firm income. Indeed, many firms take a creative approach in combining these basic elements to reach a result that their members find fair. For instance, a firm could pay each partner a minimum and then use another method to divide up any balance of cash left at the end of the year. A firm could distribute a third of its net income on a lock-step basis, a third based on total hours and the rest on a formula basis that gives 70% credit to origination and 30% to service. It all depends on what the partnership wants to reward.

Finally, whether partnership terms work well for any firm depends on one big intangible: trust. Do attorneys trust each other to continue developing and maintaining their separate practices? Do they trust each other enough to work together on firm and client projects, to assume joint liability, to share the burdens of administration and not to jump ship at the first opportunity to make a few extra bucks? Do they trust each other enough to set shared goals and rewards? Most importantly, as they develop the partnership compensation structure, do they trust each other enough to have open, good faith conversations about what kind of firm they want? The level of trust drives the partners’ options.

Five Conflict Styles That Affect Our Approach To Disputes

Arrow of a compass pointing to the word mission (3D Rendering)People have different conflict styles.  They approach conflict differently.  Every conflict is also unique.  Different personalities, relationship dynamics and histories all impact how a conflict is resolved.  Mediators and Collaborative lawyers are well trained in working with people who have different personality types and conflict styles.  They examine conflicts to see if the resolution is all about compromise or if other approaches might work.  They help translate the language and positions of parties that approach conflict differently, and help them create various ways to resolve their disputes that not only meet their bottom-line needs but also make sense in terms of their approaches.  While mediators and the Collaborative Law team use different specific techniques, the overall philosophy is the same.

In one model that is commonly used to analyze conflict, there are five primary modes of conflict: avoiding, competing, compromising, accommodating, and collaborating.  None of them is best at all times.  Each of these modes has its appropriate place, sometimes even during different steps of resolving the same conflict.

People avoid conflict when their sense of self-protection is triggered or when conflict is uncomfortable.  It also makes sense if the timing is bad or one party has not had enough time or information to prepare for real engagement.  Many disputes begin with avoidance.  However, if both parties continue to avoid conflict, it may prevent a resolution.

Competing and accommodating occur when an individual focuses solely on his own goals or primarily on the interests of the other party, respectively.  Pure competing mode is totally selfish, and pure accommodating is totally selfless.  Pure competing can be a good approach when the relationship is unimportant or, in commercial cases, if that is the culture of the relationship.  Pure accommodating can be a good approach when the issue is much more important to one party than the other or if the relationship is so important that any hint of competition might damage it (think of the dysfunctional boss versus the longsuffering employee!).  Either one may result in a “win” under the circumstances, depending on on what is important.  However, most of the time, people tend to compromise, finding solutions in the middle that at least partially meets the interests of both parties.

Collaborating occurs when each party focuses both on meeting its own interests while working with the other party to meet its interests as well.  It is an active process that requires listening, communication and the sharing of relevant information.  It is not the best solution to all problems, since it takes more time and resources to collaborate than to compromise.  It is the most difficult mode to enter and the easiest to fall from.

In this model from conflict theory, collaborating is a great way to “expand the pie” in coming up with creative solutions to problems.  However, when it comes time for making a decision, most of the time the options will involve some degree of compromise.  The skill of the mediator or the Collaborative Law team are in guiding the parties through the process, using whichever techniques best fit the situation.  For a complicated conflict – especially one that has already reached the legal system – these roles are helpful.

Finally, these roles can be helpful in developing contractual arrangements, like partnerships.  People who have to learn to work together sometimes benefit from assistance in applying these different conflict styles to the negotiation of the terms of their arrangements.  Properly trained professionals can help.

Here is an easy way to remember the different conflict styles:

Avoiding – Run away!
Competing- I win
Accommodating – Whatever you want
Compromising – Let’s split the baby
Collaborating – Is there a way to expand the pie so we both get something we want?

Planning for Employee Termination

Employee Termination

In any organization, employees come and go. It is a difficult fact of life that some do not go voluntarily. Planning for employee termination can help reduce the strain on both the organization and employee, as well as reduce the risk of costly and uncertain adversarial proceedings like administrative claims and lawsuits.

Start by making sure everything relevant is in the employee’s file. Have you heard the expression “Location, location, location” to describe the three most important factors in real estate? In employment matters, the key is “Documentation, documentation, documentation.” Your HR professionals should know what to include in the file, but if your organization is too small to have an HR department or in particularly sensitive cases, it is worth speaking with a lawyer. As a general rule, it is best if the employee’s file contains a contemporaneous record of any performance issues (that is, documentation prepared at the time of the problem, not later on in anticipation of termination).

If there are special circumstances, like a disability or even an employee over 40, be even more careful with the documentation. Employees can use administrative systems like the Massachusetts Commission Against Discrimination or the Equal Employment Opportunity Commission that may result in the employer’s having to pay the employees’ legal fees!

There is no easy way to deliver the message. In most cases, it is best delivered in person by two people, one doing most of the talking in a businesslike manner, with the other being a witness. Be prepared for disappointment, anger or even tears. A sympathetic ear and a box of tissues can go a long way to smoothing over the conversation. Some employers do not care about how the message is delivered or received, since the employee is leaving? However, an unhappy employee who feels treated with disrespect or lack of dignity is the one most likely to create legal issues.

Most people are conflict averse. Some employers have been known to take extreme steps, like terminating employees by e-mail or even text messages. At one of my prior jobs, a supervisor who was supposed to terminate an employee on a Friday afternoon “forgot,” and the employee found out on Monday when the receptionist stopped putting through calls. These kinds of actions end up costing employers extra money and creating a negative reputation in the community.

Be aware of security concerns. Remove computer access, change passwords, retrieve any employer-provided mobile devices and keys and deactivate card keys. If the termination is effective immediately, do you need to escort the employee off the premises? If you have given the employee notice but termination is not effective immediately, consider whether it makes sense to restrict access to computer systems to those that the employee needs to wind down his or her work.

Finally, be aware of the true costs of termination. Although they may feel like extortion, they are the price of doing business. Your unemployment insurance premiums may be affected. You may have to pay to defend a claim and divert management time and attention. Your reputation in the community may become so damaged by the mudslinging that it becomes hard for you to hire again in the future. In some circumstances, it may be better for you to be up front about paying severance, even when there is no written employment agreement or employee handbook policy calling for it. Proper preparation and negotiation may help contain these costs.

After the Conflict is Resolved

You are walking away at the end of the argument. Your hands are shaky and clammy.

Or you are walking from your lawyer’s office or a mediation session. Although you reached a settlement, you are tired and wired. It has not sunk in yet: this battle is almost done.

Or the arbitrator’s decision is sitting unopened in your e-mail inbox. The hair on the back of your neck stands up and your throat closes as you reach for the mouse.

Or, for that matter, you are sitting sullenly across the table from your spouse after exhausting all words. You avoid eye contact, concerned that the fight might start back up even though you are no longer sure what sparked it.

People become attached to conflict. It does not matter who you are, or whether you are fighting on behalf of yourself or your organization.  As a conflict is prolonged, people repeat and rehearse the story over and over again in their minds. When it is time to move on, it can be hard to disengage.

At the same time, the stress of conflict manifests itself physically. Cortisol and adrenaline are flowing through your veins; muscles are tensed in your shoulders or wherever else in your body you store tension; and the sheen of sweat on your face visibly thickens as the day goes on. Left alone, all this is poisonous: it can be unpleasant and seriously affect work performance or even daily life after the conflict is done. Addressing conflict poison is not touchy-feely or new-agey.  It’s practical.

So what can you do? Here are some suggestions:

  1. At an immediately practical level, even though the moment of most intense conflict has passed, the final resolution may require you to take affirmative steps. These steps may include working with attorneys on settlement documentation, figuring out how to come up with a payment you are not happy about making, managing internal repercussions within your organization or with a spouse or reorganizing your schedule to meet new responsibilities.  These activities are vital on two levels, both doing what you need to do to complete the resolution process and, psychologically, transitioning away from conflict.
  1. Get the conflict out of your body. Exercise, lots of fluids to wash the toxins away, getting a massage, doing yoga or taiji, meditating if that is your thing – before you have that drink!  Although our built-in response to conflict is fight, flight or freeze, in the kind of conflicts you are likely to find yourself the chemistry of that response is not helpful for refocusing once the conflict is done.  Get that stuff out of your system or it may stick with you and slow down the process of moving on.
  1. Look forward, not backward.  People often tend to ruminate about the past.  Now is the time to answer the mediator’s question about what life looks like after the conflict – whether it is in your personal or professional life.  Act consciously. Managers should seek new responsibilities; those in less authority should wrap up their involvement and move on to the next project; individual disputants should seek out personal interactions in which the conflict is not the main topic of conversation.  You know what to do.  In time you will stop thinking about how things might have turned out.

Start planning beforehand:  how are you going to put on the brakes so you can go forward?