Change in control agreements are often referred to as “golden parachute agreements”; These types of contracts became popular in the 1980s when hostile takeovers were common. In today’s business world, even in friendly takeovers, senior executives are requesting protection to continue employment. The acquiring company wants to negotiate retention agreements to provide stability in management during the transition.
If a parachute agreement is breached, federal law provides protections in addition to those provided by contract law. Retention agreements are typically covered by the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 etseq. Under ERISA, a change in control agreement is treated as an employee welfare benefit plan.
Any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund or program was established or is maintained for the purpose of providing for its participants or their beneficiaries . . . any benefit described in section 186(c) of this title. . . 29 U.S.C. § 1002(1) (1988 Supp.).
If a change of control agreement is breached, the court will examine the parties intent for entering the contract. The key employee or senior executive can use ERISA to argue a fiduciary relationship – that the company owed a fiduciary obligation to pay benefits when a change of control occurs. In other words, the company acts as the trustee that must protect the beneficiary’s (the executive’s) interests.
The ERISA arguments are not easy for the executive. Initially, the executive must prove that the change in control provisions are a welfare benefit plan. The court will also look at whether a reasonable person determine the intended benefits, ascertain the class of beneficiaries, and
the financing and process for payment of the benefits. Thus, it is important for key employees who have a golden parachute agreement to understand that ERISA may have an impact on the adjudication of his or her parachute payment.
Whether you need assistance negotiating it in an employment contract, retention agreement or upon termination, Mailly Law can help. We will increase your bargaining power and help ensure that you obtain the compensation and benefits you deserve. Contact our office today to schedule your consultation.