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Walk-Away Rights in Employment Agreements


401 Chaos

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Not really a 409A question per se but was not sure where else to post.  Have a client that is interested in providing an executive with an old-fashioned walk-away right upon a change in control.  They might approach that as a very broad / watered-down "Good Reason" trigger but I think the current desire is to just give the executive a straight unilateral choice of quitting and getting existing severance benefit if he quits within two months of a change in control.

Obviously that wouldn't fit within a good "good reason" definition and so wouldn't seem to qualify for an involuntary separation exemption from 409A but I think they are willing to provide for a lump sum payment within 2 1/2 months of the CIC so arguably we could exempt it from 409A (or arrange for it to comply with 409A schedule if exercised).

I see these so rarely these days though that I'm questioning other aspects here.  For example, is there any constructive receipt concern if the executive elects not to leave following a CIC--e.g., that the IRS could argue that he should be deemed in receipt of the severance amount because he could have elected to receive it.  (We would draft so that the right vests upon a CIC but would be forfeited if he didn't exercise and separate from service within 2 months.)  I don't recall constructive receipt issues being a real concern when these provisions used to be more common but wanted to check.  Also, along the same lines, I'm assuming this would operate the same way for 409A purposes as an executive having a valid good reason trigger or right and not exercising it--i.e., 409A doesn't seem to have a problem if a service provided passes up a good reason right.

On a related note, how does 280G generally deal with these sorts of provisions, particularly in a private company cleansing votes?  Presumably the benefit would need to be factored into the potential parachute payments subject to shareholder approval since it could be exercised simply upon the CIC?

Any thoughts would be appreciated.  Thanks

 

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I've seen the terminology "modified single trigger" in discussions about separation pay as payment upon voluntary termination post-CIC for a period of time, which sounds like what you are describing here.  As long as there is no element of additional deferral, doesn't seem to be an issue.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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