Amanda DeMatteis: Hi, Josh.
Josh Goodbaum: Hi, Amanda. What are we talking about today?
DeMatteis: I thought we would talk about mergers and acquisitions. Let’s say a client comes to you and their company has recently been acquired by or merged with another company, and after that merger or acquisition, the job that they’ve been doing for a number of years isn’t really what they’re doing anymore, and they don’t quite know where their place is in this new company. And they ask you, Josh, has their employment been constructively discharged as a result of their position just not being what it was before?
Goodbaum: The answer is maybe, Amanda. It depends on what the reason for the constructive discharge is and whether you have contractual protections. A constructive discharge is a termination without calling it a termination. But a constructive discharge is generally illegal only if it is motivated by a protected characteristic or protected conduct. Let’s assume that doesn’t exist here.
What we have left are the contractual protections that an employee might enjoy when their employer is acquired. We often see in the lead-up to an acquisition that the company that is going to be acquired will put in place contractual protections for sometimes all of its employees, sometimes just its senior executives, and it usually takes the form of what is effectively a “good reason” protection.
A “good reason” clause in an employment contract provides that an executive or other employee can resign their job with a severance if certain conditions have occurred, and one of those conditions is usually that there has been a material diminution in the employee’s duties or responsibilities. And if the employee’s job has been effectively taken away from them, even if they continue to have the same title, then the employee has experienced a material diminution in their duties and responsibilities.
In order to figure out whether an executive has any protection under a “good reason” clause – that is, whether they can obtain any compensation – they really need to look at the documents in their case, and they likely want to do that with a lawyer because the documents can be quite complicated.
A “good reason” clause or another clause that protects against constructive discharge could be in an equity agreement or option agreement. It could be in the company’s severance plan. It could be in the merger or acquisition agreement. And there could be lots of other complex corporate documents that contain these protections for executive employees.
So, if your company has been acquired and you feel like you’re being squeezed out of your job or not allowed to do your job the same way you used to, that’s a time to call an employment lawyer who represents executives and have a conversation about what protections exist for you.
DeMatteis: Josh, what about a “change in control” agreement or clause that may be contained in another legal document that an employee signed at some point?
Goodbaum: A change of control clause, Amanda, is typically included in an agreement that grants to an employee either stock in their company or options to purchase stock in their company or another kind of quasi-equity relationship, such as the right to receive money in the event of a certain event – often a merger or acquisition or IPO – occurring in the future.
Typically, we see equity and options and sometimes also so-called “phantom stock” vesting over time. That means the longer you stay with the company or the company reaches certain other benchmarks, the more of that benefit you enjoy. Typically, those grant agreements will contain a change in control clause that says that, if your company is purchased in whole or in large part or has another liquidity event, then all of your stock or options or other interests automatically vest, and you have a right to that interest at the moment of a change in control.
Likewise, you could have a “good reason” clause in your individually negotiated executive employment agreement. This clause would often say that a change in control would in turn cause a good reason separation that would allow you to walk away from your job with the severance that you would otherwise have only if you had been terminated without cause.
So if you’re dealing with a change in control, or if you’re dealing with believing you’ve been constructively discharged in the aftermath of a merger or acquisition, those are times to speak with an executive employment lawyer, review the documents very carefully, and make sure that you’re doing exactly what the documents require of you in order to realize the benefits to which you are entitled.
DeMatteis: And Josh, what about the employee that does not have this type of contractual protection? Maybe their employer has been acquired or merged with another company, and what seems to be happening is that the new employer is letting go of all the prior employees, “the old guard,” if you will. Does that employee have any protection?
Goodbaum: Typically not, Amanda. It’s not a protected classification to have worked for the target company as opposed to the acquiring company. If you notice a pattern in those terminations, not just that the employees being terminated are from the old company, but also that they are older or of a particular race or have disabilities, that’s something to talk with an employment lawyer about. But if the acquiring company is just letting go of the employees who are with the target company, that’s something we often see, and unfortunately, there’s typically nothing that the law can help you do about that.
DeMatteis: Critically important information, Josh, and we’re seeing this come up more and more.
If your company is being acquired, make sure you gather up any contracts, whether they are recent or ones that you may have signed in the beginning of your employment, in preparation to talking to an executive employment lawyer.
For more information, see our website, and thank you as always for watching. Take care.