Mailly Law - August 2020

Mailly Law - August 2020

August 2020

714-384-6531 | www.maillylaw.com

Every Executive Employment Agreement Needs Severance Provisions

In my profession, I see many executive employment agreements because I draft and negotiate them to provide security for senior executives and their families. I also see agreements brought in by clients who have a dispute with their former employer. Usually, these agreements include severance provisions. I certainly advocate for their inclusion. These provisions define and outline what the executive officer can expect upon their departure from their current company. In many ways, severance provisions are like a prenup in a marriage. What happens if something goes wrong in your work “marriage”? How is each party protected and how can each party walk away relatively unscathed? When an employee outside of the C-suite is terminated, it’s not uncommon for them to receive two weeks of severance pay and benefits. Executives, on the other hand, often receive severance packages that offer benefits lasting anywhere from six months to a year. The benefits generally go well beyond a simple payout. Many outgoing executives have their health insurance covered, along with the ability to exercise their stock options. In other words, it’s good to be the CEO. Severance provisions benefit the executive just as much as they benefit the company providing the severance. They can prove crucial for the company to remain on good terms with the outgoing executive. The outgoing executive brought value to the company. The company may cross paths with their former executive— or they may end up doing business with the executive’s new employer. A good continued relationship could prove fruitful. Neither the executive nor the company wants to burn bridges. Of course, there are rare occasions where that happens and the

relationship is soured, but by and large, that isn’t going to be the case, and any given company (or CEO, CFO, COO, etc.) doesn’t assume the worst when the time to separate comes. During the Great Recession in 2008, I received a number of calls from CEOs who had been terminated. I looked over their executive employment agreements and was surprised how many of them did not have severance provisions, or how many severance provisions provided very limited benefits, far below what a CEO should expect. Some of these CEOs were only seeing two weeks’ worth of severance pay or benefits. Others received a week of severance for every year with the company. That was adding up to 10-15 weeks of severance for some of these now former executives. It wasn’t until their termination that they realized the “oversight.” Unfortunately, this type of situation has the potential to put the executive in a difficult negotiating position. After all, the executive agreed to the terms of their employment. Even then, the CEOs still had some leverage to renegotiate the terms of their severance after termination. In this type of situation, we negotiated with the knowledge that the former CEO did not really want to sue their former employer and the company did not want to be sued by their former CEO. Litigation tends to put both parties in a bad light. In this type of case, I was usually able to negotiate a post-termination agreement. The end result varied from client to client, but they were seeing anywhere between 3–6 months of severance rather than a few weeks. Ultimately, severance provisions can be a powerful recruiting tool for companies. Who doesn’t want to attract strong leadership?

From the perspective of the executive, a healthy severance package helps mitigate the risk of moving from one company to another. When they see they will be taken care of well, that boosts their confidence in the decision to join your firm. This is particularly true for executives moving from a well-established company to a startup. It can be a risky move. The startup may not have a lot of value right out of the gate, but a seasoned CEO at an established firm might see the potential to increase the value into that startup and walk away a lot wealthier. But that CEO needs assurances, and well thought-out severance provisions can be an influential factor. The bottom line is this: Every executive employment agreement should include severance provisions. The incoming CEO or C-suite executive should know exactly what to expect when they part ways with the company. And if you’re an executive, make certain those severance provisions are in place and that you are happy with them before you sign. Call Mailly Law to review and negotiate your employment agreement.

–Guy Mailly

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THE LASTING IMPACT OF THE DEEPWATER HORIZON OIL SPILL LEGAL IMPLICATIONS WE CAN STILL SEE TODAY

Although not many people realize it, the 2010 Deepwater Horizon oil spill greatly affected many aspects of the legal system we rely on today. The head of litigation for BP at the time, James J. Neath, says the case was a “life- changing event.” For over a year and a half, BP’s large internal and external legal teams worked continuously on the crisis response 16 hours a day, seven days a week. Neath describes the workstream as “devoted to identifying, preserving, and ‘live-streaming’ video footage of the ongoing leak.” On top of the overwhelming >Page 1 Page 2 Page 3 Page 4

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