19 February 2010

Overgenerous Fired CEO Settlement Undone

The 2005 revision to the bankruptcy code was specifically designed to make it easier to undo severance payments to executives on the even of bankruptcy. A new case from the 5th Circuit put that into action, affirming a clawback of $2.2 million of a $3 million severance bonus to a former CEO.

His employment contract provided that he would get $3 million if he was fired without cause, $1.5 million if he was fired for good cause, and $0 if he resigned. He negotiated a deal with the company to pay him $3 million in installments, and then resigned after the deal was struck. The trial court found that the company had good cause to fire him and knew it, so it found that the company did not get "reasonably equivalent value" when it agreed to pay the former CEO the full $3 million.

The settlement was the last straw that forced the company into bankruptcy.

The analysis used, in theory, could apply outside bankruptcy as well.

Difficulties that might have been raised about the value of his services were avoided because there was an employment contract in place which could be measured against the settlement reached.

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