October 29, 2013
THE CONSEQUENCES TO THE STATE FOR WITHDRAWING FROM THE JACKSON LABORATORY CONTRACT
By: John Rappa, Chief Analyst
You asked if the state would incur any financial penalties if it withdraws from contracts with Jackson Laboratory or other private entities to whom it provides economic development funding.
The contract with Jackson Laboratory (Jackson Lab) is silent on whether either party can withdraw from it, but specifies (1) the conditions under which they would be in default under the contract and (2) the consequences of such default. If the state defaults under the contract, it loses the right to certain revenues, rights, and interests. If Jackson Lab defaults, the state may postpone, reduce, or eliminate the financial assistance to which Jackson Lab is entitled under the contract.
The contract was executed in 2012 between Jackson Lab, a federally tax-exempt organization, and Connecticut Innovations, Inc. (CII), the state's quasi-public economic development agency, to fund the Jackson Lab project, as authorized under PA 11-2, October Special Session (OSS). The act authorized up to $290.7 million in state general obligation bonds over 10 years for (1) constructing and equipping a research laboratory and office for Jackson Lab and (2) funding related research. Attachment 1 is a 2011 OLR Report comparing the funding of the Jackson Lab project and the 2001 Pfizer project.
The Jackson Lab contract was drafted specifically to implement PA 11-2, OSS and thus differs from the standard agreements the state uses to provide financial assistance under statutory economic development programs. The agreement under which the Department of Economic and Community Development (DECD) generally provides financial assistance to businesses under the Manufacturing Assistance Act program does not include provisions allowing DECD to end its obligations or specifying the conditions under which it would be in default. The agreement specifies only the conditions under which the business would be in default and DECD's available remedies (Article 4—Default). Attachment 2 is a copy of the agreement.
DEFAULTS AND REMEDIES
CII Default and Jackson Lab Remedies
Table 1 summarizes the conditions under which CII or the state would be in default under the contract and the remedies available to Jackson Lab if this occurs. As the table shows, CII or the state would be in default if they do not provide funds for the Jackson Lab project as PA 11-2, OSS requires. Jackson Lab's remedies include forgiveness of outstanding loan amounts and termination or release from various contractual terms and conditions. These remedies are available to Jackson Lab only if CII or the state fails to cure the default within 120 days after it occurs.
Table 1: Conditions Constituting CII Default under Jackson Labs Contract and Jackson Labs' Contractual Remedies (Article 15)
Conditions Constituting CII Default
Remedies Available to Jackson Labs
● Any State Bond Commission action deauthorizing issuance of bonds for Jackson Lab project under PA 11-2, October Special Session
● State fails to provide the bond proceeds to CII for providing loans and grants to Jackson Lab according to the act's schedule
● CII fails to make these loans and grants even though Jackson Lab has been complying with all loan and grant terms and conditions
● All outstanding loan amounts immediately forgiven
● Immediate release from documents securing the (1) $145 million loan for the research laboratory and office and (2) $46.7 million loan for furniture, fixtures and equipment (FFE) loan (i.e., Open-End Leasehold Mortgage Deed, Intellectual Property License, and Security Interest)
● CII and the University of Connecticut Health Care Center's right to purchase the facility under the stipulated contractual conditions are null and void
● Immediate termination of all future net royalty revenue and other specified payments to CII (i.e., Reinvestment Amounts)
● Release from all covenants and obligations except those requiring Jackson Lab to maintain its tax-exempt status and grant CII the rights of first purchase with respect to the laboratory and FFE.
Jackson Lab Default and CII Remedies
The contract divides the conditions constituting default by Jackson Lab into two groups—conditions constituting material default and triggering CII remedies and those where these remedies are available only if the default conditions continue beyond the deadlines specified in the contract (generally, between 30 and 60 days). Under the contract, Jackson Lab would be in default if two-thirds of CII's entire board of directors determines that any of the stipulated default conditions occurred. The available remedies include postponing, reducing, or eliminating loan or grant payments. Table 2 summarizes the default conditions and the available remedies.
Table 2: Conditions Constituting Jackson Lab Default under Jackson Labs Contract and CII's Contractual Remedies (Article14)
Conditions Constituting Jackson Lab Default
Remedies Available to CII
Material Default Events :
● Failure to cure default as required under the Land Lease and Funding Documents
● Loss or suspension of federal funding or loss or suspension of licenses affecting Jackson Lab's ability to conduct research
● Voluntary filing or consent to a petition under bankruptcy, insolvency, or reorganization law; failure to secure dismissal of involuntary bankruptcy petition within 60 days of filing; or court ruling that Jackson Lab is insolvent and unable to pay debts when due
● Nonpayment of Reinvestment Account payments
● With some exceptions, failure to provide required financial, annual, and science reports within 30 days after receiving overdue notice
● Jackson Lab encumbers equipment, materials, and supplies purchased with loans or grants before CII forgives the loans
● Jackson Lab removes or relocates outside the state equipment, material, and supplies purchased with grant funds and valued over $5,000
● Failure to comply with contract and applicable laws, policies, and mandates
● Failure to maintain tax-exempt status
● Request for annual grant contains material misrepresentation
● Ceasing operations in Connecticut or failing to comply with a written request to stay here for the next year
● Loss of federal tax exempt status
● Noncompliance with covenants and agreements that Treasurer or bond counsel determines endangers the bonds tax-exempt status
● Failure to create the number of jobs specified in the contract
● Lien or attachment exceeding $5 million laboratory, FFE, or intellectual property
Remedies for Material Default Events:
● Postpone, reduce, or eliminate loan or grant payments and take other authorized actions with respect to unforgiven loans
● Other types of defaults must be addressed according to the procedure specified in the contract (§ 14.3 (b))
Other Default Events:
● Any false representation or warranty made in the contract as of its effective date (January 5, 2012) or the annual date for awarding grants, regardless of any exceptions Jackson Lab made in its letter to CII (i.e., Disclosure Letter)
● Breach of any term, covenant, obligation, or agreement under the contract, loan agreements, and the security agreements that continues 30 days after CII notifies Jackson Lab of the breach
● CII may postpone, reduce, or eliminate loan and grant payments only if Jackson Lab cannot cure the default under the procedure the contract allows