Mailly Law - May 2020

May 2020

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Without a ‘Golden Parachute,’ What Would You Do? Understanding Severance Provisions

A severance provision, however, is an exit plan if the board chooses to move on before the sale of the company. Here are some of the critical aspects of severance provisions.

Right now, times are troubling, and company executives will have to deal with what’s left in the wake of these events. But as the business landscape shifts beneath our feet, we have to adapt. So now more than ever, you need to make sure your executive retention agreement has a severance provision.

A severance provision should outline the length of time for the executive to receive severance pay (usually six months to one year) as well as the length of time for the executive to exercise stock options. Typically, it’s a short period of time to exercise options (around 30 days), but it all depends on how the stock options are set up and the negotiated agreement between the executive and the company. If parties can negotiate before the agreement is finalized, it may be extended to six months. The retention

The primary purpose of these agreements is to ensure an amicable separation

between the company and the executive. No company wants a former CEO saying anything negative about the business after termination. Likewise, no former CEO wants to hear negative personal reports from their former employer. If situations escalate to lawsuits, then both sides look bad publicly. The best way to prevent such a fiasco is to deal with severance upfront. To incorporate a severance provision into your retention agreement, here is what you need to know.

agreement often maintains the former CEO’s health benefits for a negotiated period of time. Businesses will do this in part to keep the goodwill between the company and the outgoing CEO.

These are essential to an adequate retention agreement; however, during the Great Recession, we were flooded with calls about severance provisions. Many of those calling me didn’t have a severance provision in their employment agreement and had a difficult time negotiating severance terms after the termination. I was stunned by how many executives lacked this provision; it’s important to remember that if it’s not in writing, you don’t have it. CEOs won’t let their sales team do anything without a contract, so why should they allow themselves to not have a written employment agreement with a severance provision? Both the CEO and the company need to hold each other’s feet to the fire. The business landscape is changing, and everyone is doing their best, so it’s essential to review your retention agreement to ensure you have a severance provision. We’re all in this together, so feel free to reach out anytime. I would be happy to answer any of your questions or concerns about your contracts.

If you’ve read our previous newsletters, then you know I often refer to the “golden parachute,”which is an optional exit package a CEO can exercise in the case of an acquisition or merger. Generally, they are much more lucrative for the executive than a typical severance provision. With a golden parachute, the CEO usually has stock options and the executive benefits from the increased value of the stock during their tenure. This compensation is fair for both parties because it is the CEO’s job to increase value for the company and its shareholders. This is why CEOs will receive a check for several million dollars as they leave the company. “As the business landscape shifts beneath our feet, we have to adapt. So now more than ever, you need to make sure your executive retention agreement has a severance provision.”

-Guy Mailly | 1

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