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Eliminating Voluntary Termination


Guest shaul

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Assume an employment agreement provides for payment on either (i) involuntary termination, or (ii) voluntary termination within 90 days following a change in control. Is it permissible to revise the agreement to delete the second payment trigger, such that the amended agreement provides for payment only upon an involuntary termination, or does the substitution rule somehow prevent the attempt to ensure that payment is only made upon a substantial risk of forfeiture?

Also, is it permissible to add the language providing that each payment will be deemed a separate payment, so as to allow stacking of the short-term deferral and separation pay plan exceptions, or does that language have to be in the first and original version?

Thanks.

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  • 2 weeks later...

In my view, a company can eliminate the walk-away provision, but needs to be able to show that the right was not converted to some other payment payable at a different time (different from the applicable time treating the existing right to payment as a deferral). In the context of public company making a change in control severance arrangement more shareholder friendly (for example, by attempting to meet ISS guidelines that disfavor walk-away rights and CiC gross ups), I expect that most companies could demonstrate that the right to payment was simply made more restrictive, and not "paid for" in some other way.

A separate concern is whether the revised arrangement could somehow now qualify as a short-term deferral or under the 2-years/2-times exclusion. If it was a deferral arrangement before the revision, eliminating the walk-away right would not allow the right to payment to become something not a deferral. However, in cases I have seen the walk-away is eliminated at the time of the employment agreement is renewed due to its expiration (if it is not evergreen). In that case, I am not sure if the right in the new agreement could be treated as not a 409A deferral, if the old right to payment had in fact been legally extinguished upon expiration of the employment term.

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