Ethics: Advisory Opinion No. 2000-2

Advisory Opinion No. 2000-2
Advisory Opinion No. 2000-2

Application Of Contingent Fee Ban To Stock Options

The State Ethics Commission has been asked how the Lobbyist Code’s contingent fee ban applies to the following fact pattern:

A "start up" company is interested in obtaining certain state contracts in Connecticut and various other jurisdictions. It wishes to retain a lobbying firm to assist in the process. The company, however, is lacking in cash reserves; and intends to compensate its lobbyists with stock options. While success in securing Connecticut state contracts will not translate into a specific increase in the value of the company’s stock options; overall success in obtaining such contracts throughout the country will substantially determine the value of the options in question.

Given these specific circumstances, representatives of the lobbying firm wish to know whether it is permissible, under The Code Of Ethics For Lobbyists, Conn. Gen. Stat. Chapter 10, Part II, to accept the company’s stock options as compensation for lobbying. The Code’s contingent fee ban states, "No person shall be employed as a lobbyist for compensation which is contingent upon the outcome of any administrative or legislative action." Conn. Gen. Stat. 1-97(b).

The ordinary and customary practice of established corporations providing stock options to their officers and employees as a component of compensation does not raise an issue under the Code’s contingent fee provision. Simply stated, the actions of a corporate officer or employee who engages in lobbying will not, in any specific and discernable way, affect the stock price of such an entity.

In this case, however, the actions of the lobbyist representatives of the start up company may well produce such a specific and discernable result. Admittedly, success in Connecticut alone will not guarantee an increase in the price of the company’s stock. However, such success, both for its own value and for its worth as an example the company can market in other states, can be fairly characterized as a significant contributing factor to the overall value of the company’s stock.

Nonetheless, it can be argued that the "compensation" in this matter is still fixed, under the terms of 1-97(b), since the stock options will be transferred to the company’s lobbyists regardless of their success or failure in obtaining state contracts. This analysis, however, allows for the very application of undue influence to obtain a higher return that 1-97(b) was enacted to prevent. Furthermore, this position is inconsistent with Commission precedent which has held that a compensation agreement will be viewed as contingent if the payment can logically be viewed as substantially dependent on, although not totally determined by, the outcome in question. Ethics Commission Advisory Opinion No. 94-3. 55 CLJ 37, p. 6D (3/15/94). Given this precedent, the compensation in question is "contingent upon the outcome of…administrative…action"; and is, therefore, prohibited.

By order of the Commission,

Stanley Burdick,

Content Last Modified on 9/7/2005 8:03:24 AM