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Severance, Part 2: “Good Reason” An Important Weapon for the Executive Compensation Attorney

If you followed the recent, much-publicized battle over the management succession at Viacom, you might have noticed that even before the battle was decided, several top executives protected themselves and their families by reserving their right to resign under the so-called “Good Reason” clauses in their employment contracts.

I assume their maneuver worked, since it was later reported that the CEO who actually lost the battle departed with a payday of $72 million, the kind of money which should salve even the most bruised corporate ego.

“Cans’t thou not minister to a Mind diseased?” Macbeth asks his doctor; (you can tell that I spent my summer vacation at the Stratford Festival).  Thanks, Doc, but $72 million will do the job quite nicely.  I feel better already.

So, what is a “Good Reason” clause? It is the mirror image of “Termination without Cause,” but a little more explanation is necessary.

As I wrote in the last Perspectives, if a senior executive is terminated without “Cause” and her executive compensation attorney has done the proper job, her termination will trigger payment to her of a specified amount of severance in order to cushion her employment transition.

Now flip the situation to one in which she is unhappy or frustrated and thinking about quitting her job of her own volition.  No executive has to stay in a job — the 13th Amendment to the U.S. Constitution prohibits involuntary servitude — but when an executive quits, all benefits under her employment contract customarily come to an end.  You decide to leave, you forfeit future pay and benefits.  More importantly, you ordinarily do not receive any severance.

Enter the valuable notion of “Good Reason:”  the idea that there may be one or more specified reasons — all of which are carefully defined in the executive’s employment agreement — that permit the executive to leave of her own accord and still collect her severance.

What constitutes “Good Reason” has to be tailored to the individual circumstances of each executive, but here are some “good reasons”:

  • The employer demands that the executive make a meaningful geographical move:  “I signed up to be CEO when the corporate headquarters were in the New York area and now you’re moving the company to Akron, Ohio and want me to go with it, even though I have four kids in school in New York?  No thanks.  My contract says that if I am required to move more than 50 miles outside the Metropolitan area, I can resign for ‘Good Reason’ and receive my severance or other specified separation pay.  See you, Charlie.”
  • A significant demotion in job responsibilities; this means that the Company cannot order the CEO to be Shop Foreman even if the Company is willing to continue her pay at the same CEO level.
  • A “Change in Control” which transfers ownership, and hence the ultimate direction of the enterprise, to folks different from those who hired the executive, and for whom she agreed to work.
  • A key boss leaves.  This is a variation of the previous “Good Reason.”  If an executive is taking a job to work with a specific individual, her contract should give her “Good Reason” to leave if that individual leaves, dies or becomes disabled.

There are as many other “Good Reasons” tailored to the particular needs of the executive involved as her executive compensation attorney can negotiate, but you get the idea.

The time to focus on the particular “Good Reason” needed by the individual executive is when the executive’s employment contract is being negotiated.  That is when the corporate employer is eager to obtain the executive’s services and is most willing to accommodate the idea that there may be specific “Good Reasons” suggested by the executive’s compensation attorney which both make sense and are necessary to “seal the deal” to acquire the services of the attorney’s executive client.

Of course, like most items in an executive’s contract, the strength of that contract is in the details.  The executive must understand those details.  For instance, an executive who has obtained a “Good Reason” clause in her contract customarily has a carefully-defined window of time — sometimes a very short window — in which to exercise her right to resign for “Good Reason” and claim her severance.  The rationale is that the employer understandably does not want to give the executive an open-ended right to opt out of the contract after the event giving rise to the “Good Reason” has taken place.

To use the example discussed above, a period of 90, maybe even 60, days from being told that the CEO must move to Ohio should be sufficient for her to decide whether she is staying in NYC (having exercised her right to depart on account of “Good Reason”) or retaining her position and heading to Akron.  The employer legitimately needs to know that if she moves with the Company, she won’t be able to change her mind two years later and claim “Good Reason” as a reason for moving back to Manhattan.  So watch the timing in the particular executive employment agreement.

That said, the presence of one or more “Good Reasons” in an executive’s employment contract can make the difference between positive and terribly negative outcomes  should any of the “Good Reasons” actually come to pass.  Just ask our clients.

In the next Perspectives, I will take up the vexing issue of legal fees — a subject of concern to every client — from what I believe you will find a somewhat new angle.

About the Author

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George Birnbaum

Since 1980, sophisticated business people have relied on George to apply the meticulous preparation, attention to detail, and devotion to his clients he learned from fabled trial lawyer Louis Nizer. A graduate of Harvard College and Harvard Law School, George has over 35 years of distinguished deal-making, litigation, mediation and arbitration experience which he has used to negotiate high-stakes agreements for senior executives and select business clients throughout the United States.