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When the Smooth CEO Exit Gets Bumpy

When the Smooth CEO Exit Gets Bumpy Background Decorative Image

Recent press reports have highlighted the difficulties faced by companies that discover evidence of misconduct only after an executive has exited and received severance.

When it comes time to exit a CEO or other senior executive due to that individual’s bad behavior, there is often a strong (and understandable) desire of the board of directors to handle it as quickly as possible and with the least amount of drama and publicity.  But this can sometimes mean that not all the facts have come to light at the time of termination — and if the decision has been made to terminate “without cause,” the executive may have already received generous severance benefits on the way out the door.

What happens if subsequently more evidence comes out that, had the board known this earlier, it would have terminated for “cause,” with no severance payment?  The options available to the board may depend on what’s in the relevant agreements. Ideally, the board would be armed with the following:

  • A well-drafted definition of “cause” in the employment agreement or severance plan that covers the executive’s behavior and misconduct;
  • A clear contractual provision that provides for the cessation of unpaid severance and clawback of paid severance if evidence is subsequently discovered that would have allowed the company to terminate for cause; and
  • A separation agreement with the executive that does not include a mutual release of claims (or that includes a carefully drafted release of claims), so that the company has not waived any right to bring subsequent claims or proceedings against the executive.

Without these, the company might be faced with an uphill struggle to establish claims of fraud, breach of fiduciary duty, or other common law claims to try to recover severance payments, rather than being able to rely on clear contractual terms that contemplate this potential scenario.

Members of the board of directors (particularly of public companies) should take note of these recent press reports and make sure the agreements they negotiate for executives at the start of the employment relationship contemplate the worst case scenarios when it comes to an end.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.