February 27, 2012

Walk Down Memory Lane: New York Legislature Debacle Redux

Last week, I received this from a member: Just when you thought it was safe to do business in New York State, here comes along a New York Executive Order that is intended to apply solely to health care providers but it’s so poorly drafted that it arguably applies to all companies doing any services business with New York State. Many of us still recall the New York State Power of Attorney debacle of 2009-2010. The state legislature had amended New York State’s power of attorney (POA) law in a commendable attempt to protect the elderly from unscrupulous financial advisors using broad POAs to clean out their bank accounts.

Unfortunately, because of poor drafting, it had the unintended consequence of applying to ordinary course POAs given in the corporate context. Among other things, that law required that when corporate directors were signing POAs in New York authorizing SEC filings for their companies (regardless of whether the company at issue was incorporated in New York, Delaware or elsewhere), the POA had to include language stating that the directors were giving the company the power to spend the director’s personal funds and sell the director’s personal property. The legal and corporate communities spent significant time and money over the course of a year to address this legislative snafu, resulting in the governor signing a technical corrections bill in September 2010, with retroactive effect to the date of the original amendment a year earlier, to make it clear that this law did not apply in the corporate context.

Governor Cuomo Signs Broad Order to Address Espada Scandal

Against that backdrop, you might naively think that the state legislature, and in particular the Governor’s office, would be more careful in their drafting endeavors. Apparently not. The latest gift from New York to the corporate community is in response to the scandal-plagued health-care clinics founded by Pedro Espada, former member of New York State Senate. In April 2010, then State Attorney General Andrew Cuomo alleged that Espada used his health care clinics as a “personal piggy bank,” for e.g., submitting expense bills for $20,000 in sushi deliveries. And this January, now Governor Andrew Cuomo signed New York Executive Order No. 38 (Limits on State-Funded Administrative Costs and Executive Compensation).

Why the Corporate Community is Concerned

Specifically, this executive order would prohibit any entity that falls within its purview from (i) paying “any executive” more than $199,000 per year from “state authorized payments” (not defined) and (ii) using more than 25% of state-authorized payments for “administrative costs”. Unfortunately, the executive order raises more questions than it answers, including which companies fall within its scope and whether “state authorized payments” should be broadly read as meaning any payments by the state as an ordinary course customer of vendors including public companies. The most reasonable interpretation of this short executive order is that it does not apply to large public companies, for e.g., who act as vendors providing financial, consulting or IT services to New York State. However, we are told that the Governor’s office has refused to agree, even informally, with that assessment, instead suggesting it may apply to public companies who provide any services to NY State as a customer. (Note to Delaware companies: There is no language in this executive order limiting it to service providers incorporated in New York — so this is an issue for any and all companies who provide services to New York State).

The New York Business Council has taken the laboring oar in trying to focus attention on the broad scope and unintended impact this order could have on the corporate community. Unfortunately, however, the order has already been signed, with various state agencies being provided 90 days (until mid-April) to issue their own implementing regs. From our perspective, the best “fix” would be a simple clarification that this does not apply to public companies that are subject to SEC reporting obligations. Instead, it is limited to service providers like nursing homes, hospitals, etc. who receive state funding like Medicaid payments. If we do not get this reasonable fix, the corporate community will have to spend more time and money debating the applicability of the implementing regs issued by various state agencies.

Message from New York State to the Corporate Community?

All this really raises the question of what message New York State is trying to send to companies that do business here. Is it: “We believe that you have unlimited time and resources, and we rely on you to correct our huge mistakes”? Or perhaps, “We want to make sure the corporate community never mistakes us for Delaware – a state that may give you laws you don’t always agree with but at least you can understand them and see they were intended to apply to you in the first place.” Hopefully, the Governor’s office will step up to the plate and issue a simple technical correction to narrow the scope of this order to the legitimate situations it was originally intended to cover.

Why Aren’t There Women or Minorities on Facebook’s Board?

Professor Usha Rodrigues recently wrote this blog on the “Conglomerate Blog” about one of the numerous governance question marks about Facebook as it prepares to go public. Unfortunately, gender – and racial – disparity in the boardroom, Wall Street and many other places continues to be a big problem that never seems to get better. Of the 54 guests on the Sunday morning talk shows for the month of February, do you know how many were men? 51. Here is more on that topic…

Congrats to our own Randi Morrison for being among the distinguished women selected for DirectWomen’s Board Institute! As I’ve blogged before, DirectWomen is an organization devoted to helping qualified women – who also are lawyers – get recruited to sit on boards…

The Largest FCPA Case in US History

In this podcast, Stephen Bronis of Carlton Fields provides some insight how a client – Stephen Giordanella – was acquitted in the largest foreign bribery case in US history (since I taped this with Stephen, all sting charges have been dropped for the remaining defendants under this court order), including:

– What is the background of the case?
– What did the court find?
– What are the lessons learned for executives?

– Broc Romanek