X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
While a merger involves a number of employment issues, none is more important than the handling of top executives. An acrimonious departure of a high-level executive creates problems for a company that may ensnarl the board of directors, major shareholders and management in a high-profile dispute that is costly in terms of time, money and adverse publicity. Understanding the issues and a company’s options can help a general counsel maximize corporate efficiency while minimizing exposure to employment suits. � Golden parachutes: If a company is likely to merge, it should consider offering golden parachutes to its key executives. A golden parachute provides an executive with a safety net of benefits. It shifts job displacement risk, inherent in any merger, from the executive to the employer. As commentator Robert W. Thompson observed in the January 2000 issue of HR Magazine, “Most shareholders support well-designed CIC [change-in-control] protection as a means of keeping executives focused on shareholders’ interests, rather than their own interests, when the company is in play.” A golden parachute will benefit shareholders because the surviving entity will have a larger pool of talented executives from which it can cherry pick. Most important, until such time as operations are fully integrated, it is essential that executives with specialized knowledge of the two companies’ operations remain in place. Most companies utilize golden parachutes. A January 2000 survey of more than 100 companies reported in that same issue of HR Magazine found that “nearly all” provided golden parachutes to their CEOs and other top officers. A 1997 American Institute of CPAs study of 350 corporations found that 64 percent of companies provided golden parachutes for one or more key executives. When drafting a golden parachute, a general counsel should carefully consider the events that allow an executive to trigger a good reason — an escape clause — that entitles the executive to leave the company on his or her own accord and still receive all of the golden parachute benefits. Many executives are delighted to receive generous golden parachute benefits. Accordingly, if a simple change in the executive’s job title, status, duties or responsibilities can trigger the good-reason escape clause, it may hamstring a company’s ability to reorganize or transfer its executives. The good-reason provision should focus more on compensation instead of job status or the location where the executive works. Require the executive to specify her good reason in writing. Be sure any event that triggers the good-reason escape clause is material. Also consider a clause that gives the corporation 90 days to cure the good reason proffered by an executive. � Consider paying benefits over time or including a clawback provision: Executives forfeit benefits provided by the golden parachute if they violate its obligations. Also, consider adding nonsolicitation and nondisclosure clauses that condition the departing executive’s benefits on refraining from soliciting employees, clients or customers, as well as guarding trade secrets and confidential information. Provisions that require the company to pay for the departing executive’s attorney fees if a dispute arises over the golden parachute put a corporation at risk. General counsel should view them with the disdain a military general would reserve for a treaty requiring his army to pay for invaders’ tanks in a war. Don’t fund a potential opponent’s litigation against the company in advance. Finally, add a binding arbitration provision as a way to resolve all disputes promptly and confidentially while minimizing the company’s attorney fees. � Analyze the proposed layoff: Obviously, in deciding which executives to lay off, a company must undertake an adverse impact analysis to ensure it does not create exposure to discrimination claims. In reviewing the list of executives tentatively scheduled to be fired, pay careful attention to whether any of these executives have complained of or opposed a discriminatory practice, an illegal practice or raised whistle-blowing-type issues. Firing executives who fall into these categories is particularly dangerous because retaliation, Sarbanes-Oxley Corporate Fraud and Accountability Act of 2002 and whistle-blowing-type cases are expensive to defend, have adverse publicity consequences and tend to generate large jury verdicts. R-E-S-P-E-C-TAssuage the egos: The likelihood of suits decreases whenever a company allows its executives to depart with dignity. Most high-level executives have healthy egos. I have seen senior executives take significantly less severance money when the company cooperates with them regarding their departure. Executives are more likely to sue a company when they are summarily fired without the opportunity to create the appearance that they voluntarily resigned. Too often, companies approach severance negotiations from a purely monetary standpoint without considering the emotional aspects from the executive’s standpoint. At little or no expense, a company can provide numerous nonmonetary benefits many executives value more than the company does. This is a recipe for a win-win resolution. Some of these benefits include giving the executive substantial time to look for another job so it appears that he or she was not fired but left the company to take a better job. Allow the executive to participate in the wording of the company’s press release regarding his departure. The timing and characterization of the severance payment presents another opportunity to give the executive something of value that costs the company nothing. Categorizing the severance payment as a bonus instead of a severance payment allows the departing executive to have on record that he received a bonus, which may assist with his job search. Consider keeping an executive on the payroll as an employee or consultant and paying the severance over time, thereby eliminating a disadvantageous job gap on the departing executive’s curriculum vitae. This method also allows an executive who is just a few years shy of vesting in the company’s deferred compensation plans “bridge” to the date at which she’ll be fully vested in stock options, pensions and supplemental executive retirement plans. Payment over time also benefits the company when the severance agreement includes clawback clauses; it’s easier to withhold payments than try to get an executive who has violated noncompete, nonsolicitation or nondisclosure clauses to disgorge payments the company already made to him. Other nonmonetary benefits to consider include giving the executive complimentary memos, awards or board resolutions that pre-date her departure date. Also, the company can permit her to “officially” maintain an office — with such trappings of employment as receptionist services, use of company letterhead, voicemail and e-mail — but with the stipulation that she does not physically come on to company premises. Such an assisted appearance of continued employment can help the executive find a new placement, at relatively low cost to the company. Additionally, subject to the stock option plan and Securities and Exchange Commission regulations, stock options offer a variety of negotiating positions, such as vesting unvested stock options or extending exercise dates. Depending on taxes, an executive may prefer deferred severance payments. To reduce potential liability for defamation, most companies release only basic name, rank and serial number information about former employees. However, company records often note whether the executive’s departure was voluntary or whether the executive is eligible for rehire. Some executives believe these listings affect their ability to find other employment. Since most companies paying a severance require a release that the employee will never seek re-employment or reinstatement, a company should agree that the executive is eligible for rehire but require the executive to contractually agree never to reapply. This resolves the issue to the satisfaction of both parties. In addition to offering outplacement assistance, consider helping in the job search through connections the company’s other executives or directors may have. This may include personal references. Although Texas law does not require employers to turn over personnel files to most employees, consider offering this benefit to the departing executive. Some executives believe obtaining a copy of favorable reviews and achievements in their personnel file will help them obtain a new job. The company is not giving up much because if the matter is ever in litigation, it will have to turn over the personnel file. Although it does not involve a great deal of money, consider agreeing not to fight an executive obtaining unemployment benefits. If the company wants to prevent an executive from receiving severance payments and unemployment benefits, severance should be paid as wages in lieu of notice. A severance payment made pursuant to contract, which is based on length of service, does not constitute wages in lieu of notice. Under those circumstances an executive can immediately obtain unemployment benefits. A little bit of respect and creativity from in-house counsel and the human resources department goes a long way to soothing a departing executive’s bruised ego and assisting him with his job search — all of which can reduce what the company might otherwise pay to the executive.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.