Published on February 5th, 2019 by Alan L. Sklover
“I am no longer afraid of the storms for I am learning how to sail my ship.”
– Louisa May Alcott
ACTUAL CASE HISTORIES: Kalisha, 44, had worked for six years as the Financial Controller of a St. Louis-based, family-owned lighting distributor. After three generations of family ownership, during which the staff grew from two to 150, the grandchildren-owners received an inquiry from a Private Equity firm about their interest in possibly purchasing the company. With assurances that each grandchild would likely make many millions of dollars when, three to five years later, the “re-invigorated” company was to be sold. It didn’t take long: they decided to “cash out.”
Pretty soon, the Private Equity firm, their lawyers and their accountants began reviewing the company’s financial records, bank statements, leases, employment agreements, all as part of their “due diligence,” upon which their formal “offer” would be based.
It did not surprise anyone when the company’s owners called for a meeting of the company’s executive team to announce what was happening. At that meeting, the overall message was clear: “This is a great opportunity for everyone. There will be bonuses, there will be stock ownership, and this will be a golden opportunity for everyone . . . So long as you stay on board, work hard, help make the company a greater success, we might just make enough money to never work again.” Wow.
Then, four months later, without warning, the management team were called into a conference room, given documents to review, and told they needed to be signed by the next morning. Each executive received six documents, some one page long, some tens of pages long, each nearly impossible to understand due to their dense legal wording, multiple definitions, and confusing cross references. When some people asked for a chance to have their attorneys look them over, they were sternly warned, “What are you going to do? Don’t you trust us? Don’t ruin this for everyone.” To make a long story short, everyone signed, and no one ended up happy.
As Private Equity investors increasingly assemble “private equity” – meaning investments from college endowments, individual investors, pension funds, and religious organizations – this scenario is playing itself out scores of family-owned companies each day.
LESSONS TO LEARN: The commonplace understanding of employment agreement negotiation is a rather simple, three-step process: (i) first, the employer provides the employee with a draft document; (ii) then, the employee and his/her lawyer look it over, (iii) finally, the employee’s lawyer and the employer’s lawyer discuss, and negotiate, mutual concerns. With few exceptions, that is not how Private Equity investors and owners operate today with companies they purchase in order to sell.
With few exceptions, Private Equity investors (a) buy, (b) change, and (c) resell companies over three to five years. They are not long-term investors. They seek the best possible return for their investors and themselves, and do anything and everything they can think of to do just that.
The problem is this: to do so, they often promise the sky, and make sure the “papers” provide little or nothing of that. Instead, they tend to (a) reduce employee overhead (meaning salary and benefits), (b) manage to avoid paying out “suggested” promised bonuses and stock or other forms of equity, and (c) make sure that the agreements that they require employees to sign provide them the right to do just those things. Generally speaking, over time, they will bring in their own executives whose job is to sell the company, not to run it. They have no loyalties; they have only greed, and the legal help to get them what they want. Unless wisely resisted.
Do they want anyone to know or understand what they are signing? No. And they are good at it. Remember: (a) Buy, (b) change, (c) sell, within three to five years. And to do so they engage in what I call “hurricane tactics.”
“Hurricane Tactics” are what I call the use of seemingly overwhelming force, in an atmosphere of near-blindness, by among other things a “blizzard of papers,” so that the course of events proceeds this way: (1) rather vague assurances are made to employees of great opportunity and fortune, provided the employee agrees to remain and work hard for several years, however (2) without any solid commitments being made to ensure the employer fulfills those vague assurances. Instead (3) the agreements are chock full of provisions by which the employer is enabled to avoid and evade any commitments, of any kind, to the employee.
A. What are these “Hurricane Tactics?”
1. Lack of Clarity: The use of words, phrases, definitions and dense, complicated language an experienced employment attorney has a devil of a time understanding. There is simply no good reason to draft legal documents no one can understand; only bad reasons. (See the next section: The documents almost always say, one way or another, that if there is anything unclear in the documents, the “Management” has full and final say about what it means);
2. “Unlimited Leeway”: Provisions in the agreements that give to employers the sole, final and unreviewable decisions – like “sole and unreviewable discretion” – as to what a document means, or what constitutes “reasonable,” “promptly,” “bad faith,” “adequate performance,” “cause” and “misconduct,” to name just a few, making those words and phrases essentially meaningless;
3. “Subject-To” Provisions: Phrases that make the employment-related agreements “subject to” other documents that are not provided for review, such as the Limited Liability, LLC Operating, or Shareholders’ Agreement. Others, such as the “Award Agreement” for stock or options are often not even drafted yet. “Subject to” means that this document is subservient to other documents, and that those other documents govern and control in the event of any inconsistency, conflict or dispute. But it is almost always the case that you have no right to change those other documents, and they do, without telling you. (See the next section.)
4. “Incorporation by Reference” of Other Documents that are Changeable Unilaterally: As examples, the three agreements noted in the preceding agreement are controlling, and each of them provide that they can be modified at any time, without notice. So, if an employee is provided 2% of the company’s shares, these documents can permit 10 million new shares to be sold, making the employee’s ownership not 2% of the company, but 0.00002 percent. So these “incorporated by reference” documents can make the one you are signing essentially meaningless.
5. Coercion by Last-Minute Lateness (“Don’t be the one who spoils this for everyone.”) Perhaps most cynical of all, the practice of providing the employees only a day or even just hours, to review several documents consisting of hundreds of pages, and no real opportunity to even find or retain an attorney, to request changes or otherwise negotiate.
In one instance, my client was given only 30 minutes to sign several documents, and only the signature pages of the agreements were given to her to sign; the substance of the agreements were not provided, so she had no idea what she had agreed to. For Private Equity investors, that means “Mission Accomplished.”
So, those are the fundamental elements of the “wind-in-your-face, rain-in-your-eyes” hurricane tactics. Is it possible to successfully negotiate against these “Hurricane Tactics?” Yes, it is, and I’ve found the best way is to use what I call “Umbrella Negotiating.”
B. So, What is this “Umbrella Negotiation?” Simply, focus on two things: (i) Firm Footing (what I call “Positional Leverage”) and (ii) one Document that Covers Everything (an “Umbrella Memo”). By those phrases, I mean the use of two concurrent strategies, (i) “positional leverage” before the hurricane arrives, and you are exposed to its unsettling and disorienting “elements” and (ii) preparation of one single – and rather simple – document that covers you regarding all other documents, in all events, just as a strong umbrella does in a hurricane.
“Positional Leverage” and “Umbrella Memos” are explained in greater detail below. Simply put, for now, it is being on your firmest footing, and projecting your points in the negotiation as soon and as clearly as you can.
“Umbrella Negotiation” serves to hold back the strong wind, protect against the furious rain, and permit you to both see what is going on around you, and to stand up to it, not getting overwhelmed, drenched or “hosed.” The elements of “Umbrella Negotiation” are explained below.
Is it easy? No, but with a little effort and energy, it’s not impossible, either. Is it effective? Yes, it can be very effective, and I truly believe it is the most effective way to address Private Equity “Hurricane Tactics.” Just as David defeated the more-powerful Goliath with a firm footing and a single, simple weapon, so too can you prevail in employment negotiations with Private Equity investors or owners.
WHAT YOU CAN DO: These are the “Umbrella Negotiating” steps that I employ in these circumstances and they are in my experience the most effective way to negotiate employment agreements of nearly every kind:
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