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Showing 9 posts in Severance Agreements – Change-in-Control Provisions.
Will Fiduciary Liability Insurance Cover Severance Agreement Payments If The Company Can’t Make Them?
We write frequently about severance pay for executives – a subject near and dear to the hearts, and wallets, of executives and the companies that hire and fire them. Today, we’re going to take this a step further – beyond the severance agreement itself – and look at an interesting case that raises the question of whether a company’s severance payments to an executive are covered losses under that company’s fiduciary liability insurance if the company becomes unable to make those payments.
It’s a neat case from a lot of perspectives, even if there aren’t too many clear answers. It’s an interesting issue for companies that enter into severance agreements and then can’t follow through with the money due to a bankruptcy. Today’s case is especially relevant for us at Suits by Suits because the policyholder is a law firm that – gasp! – went into liquidation, and the executive claiming the severance benefits is a former partner at the firm. Personally, I like it because the focus of my work is insurance coverage disputes like this – figuring out what’s covered (or not) under insurance policies. Read More ›
Here's a tip that applies when you're negotiating any contract, although in this case we learn it from a negotiation over a severance contract: it's a rather bad idea to make a material change - like, perhaps, increasing the severance payment from 14 weeks of pay to 104 weeks - and then have the other side sign it, without telling them you inserted that change in their draft.
That tip comes from the Sixth Circuit's decision last week in St. Louis Produce Market v. Hughes. Two other helpful tips come from this case. One, for executives seeking to claim under a severance agreement, is to return any of the company's property if it's a condition precedent to obtaining your severance benefit. The other, for those people and their lawyers, is to not willfully disobey the court's discovery orders if you're litigating over the severance agreement. Read More ›
Corporate mergers aren’t just about the bottom line. They also have a human side, impacting employees who are laid off as a cost-cutting measure and employees whose responsibilities change as a result of the transition.
Contracts between executives and employers can play a role in this transition. Many employment contracts and benefit plans feature change-in-control provisions. These provisions can allow executives to obtain benefits if they are terminated after a change in corporate control, or even if they resign for “good reason” after their responsibilities are meaningfully altered.
In 2006, John D. Clayton, the Director of Worldwide Acquisitions and Divestitures for Burlington Resources, Inc., had one of these arrangements when Burlington merged with ConocoPhillips. Burlington’s severance plan provided a right to benefits if an employee quit for “good reason” within two years of a change in control. If there was a “substantial reduction” in the employee’s responsibilities, that would be a “good reason” for resigning, entitling the employee to benefits upon resignation.
Just before the March 2006 merger, Conoco offered Clayton a position as its Manager of A&D, and he signed a waiver of benefits under the plan. But then, shortly after the merger, it reassigned him to the position of Manager of Business Development. As Manager of A&D, he would have worked with properties that were already yielding petroleum, while as Manager of Business Development, he would only work with exploratory or developmental properties.
Clayton was disgruntled with the change, and filed a claim for severance benefits – without resigning – in August 2006. The trustee of the severance plan denied the claim because Clayton hadn’t actually quit. Clayton worked for Conoco for two more years, but then resigned in March 2008 (within two years of the change in control) and claimed severance benefits. The trustee denied his claim, determining that he had not suffered a “substantial reduction” in his responsibilities and therefore had not resigned for “good reason.”
Clayton then filed a claim in state court. Conoco, however, removed the dispute to federal court, on the ground that the severance plan required an “ongoing administrative program” and therefore fell within federal jurisdiction under ERISA (the Employee Retirement Income Security Act). And in federal court, Clayton’s claim met its end. Read More ›
American Airlines’ CEO, Tom Horton, moved one step closer to receiving the $20 million severance payment he’s negotiated with the bankrupt airline. On Tuesday, the bankruptcy judge hearing American’s case allowed the payment to stay in the airline’s disclosure statement (approval of the statement is a predicate step to ultimately “reorganizing” and exiting bankruptcy). The approval comes over strenuous objections by the U. S. Trustee, who argued that Horton’s payment violated bankruptcy law. The judge’s decision isn’t final, and the issue can be revisited down the road, but the fact that it stayed in the disclosure statement (and will be presented to the airlines’ creditors for approval) is one more hurdle cleared for Horton.
We’ve written about this payment here, here, and here. And, no, we don’t write about it so much because we’re jealous of the substantial payment Horton may receive; it’s what this case says about severance and golden parachutes generally. Although the lifetime of free travel he and his wife would also receive under his severance agreement is, frankly, kind of cool.
You might think that a company in bankruptcy wouldn’t be able to give its CEO a multi-million-dollar severance payment.
But just because a company is in bankruptcy doesn’t necessarily mean it doesn’t have any money – it just means it doesn’t have enough to pay all of its debts, or to function as a continuing concern. The company may, in fact, have the means to make a rather generous severance payment – like the $20 million American Airlines is proposing to pay its CEO, Tom Horton, as the airline comes out of Chapter 11 and into a merger with US Airways.
This proposed payment, though, has aroused more objection than a lost bag or a missed connection. Indeed, we’ve written about this dispute before at Suits-by-Suits, but like a three-mile-long runway it just keeps going on and on in bankruptcy court. In advance of a hearing on the payment scheduled for tomorrow, it’s time to take a look at where this case has been and what it can teach executives and companies about the turbulence that can happen when bankruptcy law meets severance agreements. In short, executives should know that unlike their seat cushions, their severance agreements may or may not keep them afloat in the event their employer has a crash landing. Read More ›
- The Polaroid bankruptcy trustee has sued the company’s former CEO Lorence Harmer to claw back $5.1 million in alleged kickback payments.
- The bankruptcy judge overseeing American’s Chapter 11 proceedings delayed ruling on the severance package for American’s CEO Tom Horton when he approved the airline’s merger agreement with US Airways on Wednesday. The U.S. Trustee had objected to the package. We especially like Kyle Arnold’s reporting in Tulsa World on these developments, and not just because he quoted one of us.
- A pregnancy discrimination lawsuit filed in 2009 by Julie Gilman Veronese against Lucasfilm Ltd. is headed back to the trial court after an appellate court found fault with the jury instructions and reversed the $1.3 million verdict for Veronese ($1.2 million of which was attorneys’ fees) and the California Supreme Court declined to review the ruling on Wednesday. George Lucas testified in the first trial.
- After a deal was struck last night, New York City appears to be headed the way of Seattle and San Francisco in requiring employers of a certain size to provide paid sick leave to its employees. Under the proposed legislation, companies with 15 or more employees would be required to compensate their employees for up to five sick days per year. As we’ve noted here before, federal law does not require paid sick leave and few state laws do.
Tom Horton's Severance is Probably in the Golden Parachute Bag if the Court Applies the Business Judgment Rule Rather Than Section 503(c) of the Bankruptcy Code
The U.S. Trustee in American’s Chapter 11 bankruptcy proceedings is challenging American’s $19.8 million golden parachute for its CEO Tom Horton. The Trustee contends that the $19.8 million payment is too much under Section 503(c) of the Bankruptcy Code because $19.8 million is more than 10 times the mean severance payment to non-management employees. American responds that Section 503(c) and its limit on severance payments does not even apply because American – the debtor in the bankruptcy – won’t be paying Horton’s severance. Rather, the $19.8 million will be paid after the proposed merger between American and US Airways is completed by the new company that will be formed in the merger. According to American, because Section 503(c) doesn’t apply, the bankruptcy court should defer to the company’s business judgment regarding Horton’s severance. Read More ›
Wow! A $56 Million Golden Parachute for the Heinz CEO. Well, that depends on what you mean by "golden parachute."
This week, Heinz sounded a lot like American did last week (as we noted) in justifying the size of a golden parachute for its CEO upon the completion of a merger. Heinz’s spokesperson claimed that payments to its CEO William Johnson totaling $56 million "reflect Mr. Johnson’s success in creating billions of dollars in shareholder value," including "the 19% premium" that Heinz shareholders are to receive for their shares when Heinz is acquired by Berkshire Hathaway and 3G Capital. For those of us who consider $56 million to be a whole lot of money – no matter what they guy did for ketchup sales – the spokesperson might also have said that only about $17 million of that amount (okay, still a whole lot of money) is really a golden parachute. Read More ›
Why the Color of Your Parachute May Be Gold - Change-in-Control Severance Agreements for C-Suite Employees
On Friday, we reported on American Airline CEO Tom Horton’s golden parachute in the merger agreement between American and US Airways. American is asking the court overseeing its bankruptcy to approve the merger agreement, which includes a letter agreement between American and Horton. The letter agreement provides that Horton’s employment with American will be terminated at the time of the merger, and – so long as he agrees to release American and US Airways from any claims – he will be paid severance totaling nearly $20 million in cash and stock.
Why would any company agree to such a thing? According to American, its agreement with Horton is “in recognition of [his] efforts in leading [American’s] restructuring and his role in enhancing the value of [American] and overseeing the evaluation and assessment of potential strategic alternatives that culminated in the Merger.” In other words, to compensate him for helping to make possible a good merger and then getting out of the way. The new company created by the merger can only have one CEO, and it is best for the new company not to be distracted by disputes with former executives of the old company. Read More ›