We have reviewed a large number severance agreements for executives, and we have represented certain executives when they have started at one company, moved to a different company, and on and on.
My advice to them is always the same: “Let’s try to negotiate things up front before there is a problem.” Usually, with executive-level employees, there is an employment contract that provides for some form of severance.
There are certain provisions that are more protective of the executive that should be negotiated into the employment agreement. This is an area where we provide valuable counsel to executives. We negotiate for the provisions that protect them if there ever is an occasion where their employment is terminated, either voluntary or involuntarily.
Typically, executive severance agreements provide for termination with cause, or termination without cause, and there are various ways that the agreements describe those two concepts.
Normally, when it is “with cause,” we try to very narrowly define what “cause” means. An example of what may be “cause” is if the executive is convicted of a felony. But what if they are only charged with a felony? We try to avoid nebulous concepts of “cause” such as where they are merely charged with a crime, because being charged with a crime is obviously very different than being convicted of a crime. There are numerous other examples such as “negligence” and “gross negligence” and whether the executive causes “harm” or “material harm” to the company.
Usually, if the separation from the company is for cause, there is a limited severance right. If it is not for cause, the severance right is far more robust. We try to negotiate “without cause” definitions that are more favorable to the executive. For instance, if the executive is being asked to report to a new location that is more than 50 miles away from his current location, or if he/she suffers a reduction in the amount of compensation he/she receives, usually we try to ensure those definitions are in the agreement so there is no dispute later.