Saturday, February 17, 2018

Don't Open the Veil and Invite Piercers

Thought for the day: Do something to ensure that proper governance practices are followed to make the risk of "piercing the corporate veil" even more remote.

What Happens to Officers If there Is an Accidental Death or Injury

Criminal Liability is a Risk

If an accident results in death or serious injury, local district attorneys and other law enforcement officials also will assess the situation to determine if criminally negligent or intentional criminal misconduct was responsible for the incident. Potentially, they can bring criminal charges (such as involuntary manslaughter) against individuals in exceptional cases. The standard of conduct would not be expected to be met by officers and directors of a company unless they had actual knowledge of intentional wrongdoing or directly caused a dangerous situation.

Civil Liability is a Risk

The injured person might assess the situation to determine if civil negligence or intentional wrongdoing was responsible for the incident. Injured persons or heirs can bring civil charges (such as negligence) against individuals in many cases.

The best ways to protect against these risks of liability

  • secure reasonable insurance that covers corporate liability for accidents and also includes protection for officers and directors to insulate them from personal financial risk;
  • ensure that proper governance practices are followed to make the risk of "piercing the corporate veil" even more remote; and
  • make monitoring workplace safety and health issues part of a comprehensive compliance program.

White Collar Defense

Employees and officers can be held personally liable and possibly face prison sentences, not only for their own actions, but also for actions of their employees who participate in a criminal activity. The stakes are high in white collar criminal matters. Not too mention that your company can be subject to severe penalties such as fines, disgorgement, and onerous remedial and compliance requirements, too.

Criminal liability may arise from failure to comply with various federal and state laws.

These are a few examples:


For example, misleading or inaccurate financial statements can evolve into a securities fraud prosecution. Willful violations of securities laws can create criminal exposure for both the company and its officers. These securities laws apply to both private companies as well as publicly traded companies.

What Should You Do

These are among the key actions to take: 


It is important to conduct a swift and thorough investigation so the company can understand the facts and take appropriate actions to mitigate its potential criminal exposure. The investigation may be complicated by foreign and domestic data privacy laws imposing restrictions on the collection, transfer, or processing of data. Experienced counsel can help you navigate these complex data privacy issues. Counsel can also help you assess your company’s exposure and determine the best response to the situation. If the government has not yet become involved, counsel can help you decide whether to voluntarily disclose the issue to the government.

Consider the Possible Effect on You

Because an officer is more directly involved, often an officer's exposure to the company's operating risks will be greater than the exposure of any member of the Board of Directors. The mere fact that officers of companies have come under criminal investigation can hurt the reputation and bottom line of companies and, of course, those officers. A presumption of innocence and a right to due process are not shields from this harm because these harms may be suffered wrongly and unjustly in some unknown percentage of cases. Any persons against whom criminal allegations can be made can be unjustly accused and socially punished pending a final decision. Regulatory enforcement actions and shareholder lawsuits are agonizingly slow when waiting for vindication. 

Can IRC Section 409A Hurt You?

Does IRC Section 409A Apply to You

IRC Section 409A applies to officers with "non-qualified deferred compensation plans"--which roughly means it applies to any present legally enforceable right of a service provider (like an officer) to receive payment in a later year of any taxable compensation for services.  It is broad, so Section 409A can apply to non-qualified retirement plans, elective deferrals of compensation, severance and separation programs, post-employment benefit payments provided for in an employment termination agreement, stock options, other equity incentive programs, reimbursement arrangements and a variety of other possible items.

Who Would IRC Section 409A Penalize

All of the tax penalties for Section 409A violations are imposed on the service provider (the officer, key employee or other worker).

No penalties are imposed on the company or other organization making the payments. Thus, while an employer who adopts a deferred compensation plan may seek legal advice concerning its Section 409A compliance, getting things wrong will have major consequences not for the employer but for the officers--who may have had no role in drafting the plan.

What Violates IRC Section 409A

What is a Section 409A violation? Section 409A can be violated in one of two general ways. First, it will be violated simply because documentation is not written correctly, which means if a nonqualified deferred compensation plan includes provisions that are inconsistent with the Section 409A rules. Second, Section 409A penalties can be applied if an action is taken concerning the payment of deferred compensation that violates the Section 409A rules, even if such action is inconsistent with the terms of the relevant written plans. Thus, Section 409A requires both “documentary” and “operational” compliance.

What Are the Consequences

The consequences of a Section 409A documentary or operational failure, in either case, are substantial tax penalties for the affected service providers (employees or other workers). First, the nonqualified deferred compensation in question will be fully taxable as soon as the service provider has a vested (nonforfeitable) right to receive it. Second, a 20% additional tax penalty on the value of the nonqualified deferred compensation will be imposed at the same time. In addition, under certain circumstances, an interest charge will be imposed. Generally speaking, in the case of a documentary failure the penalties would be applied to all participants who are affected by the provision in question. If an operational failure occurs, only the service provider to whom the operational failure relates will be penalized. Once an operational violation occurs, however, penalties are imposed not only with respect to the item of deferred compensation that violated the rules, but also on all similar nonqualified deferred compensation rights. “Similar” means rights under deferred compensation plans of a like type. Plans are divided into eight types: elective account balance plans, nonelective account balance plans, nonaccount balance (such as defined benefit) plans, separation pay plans, split-dollar insurance plans, in-kind benefit and reimbursement plans, stock rights and foreign plans. Thus, for example, if an operational violation occurs with respect to a service provider’s rights under a particular nonelective account balance plan, the penalties will be imposed on all nonelective account balance rights that the participant has with the same service recipient (employer), even if the other plans do not violate Section 409A. As a result of this sweeping aggregation rule, a Section 409A operational violation that seems to affect only a small amount could produce enormous penalties for the officer.

Can IRC Section 4999 Hurt You?

Can IRC Section 4999 Apply to You

IRC Section 4999 is relevant to you only if you

  • serve as an employee or service provider of a corporation and you are one of the corporation's:
    • Officers.
    • „Highly compensated individuals.
    • Significant shareholders.

And, only if the above is true in your case, then IRC Section 4999 can apply if and only if further

  • you receive a payment (of any description but sometimes called a severance) or payments incidental to a change of control of the corporation, and
  • the payment exceeds three times your average base compensation over the trailing five years.

Who Should Be Concerned

Could your employment agreement or any other bonus, termination or retirement arrangement provide for a severance or other bonus payment that is connected to a change-in-control that could exceed three times your base salary?

If applicable, IRC Section 4999 could hurt you badly


The Golden Parachute Rules, Section 280G and Section 4999 of the Internal Revenue Code (IRC)  were enacted by Congress in 1984. IRC Section 280G denies a tax deduction to corporations for parachute payments made to disqualified individuals that exceed a specified amount. In addition, IRC Section 4999 imposes on the recipient a nondeductible 20% federal excise tax (which is in addition to regular income taxes) on these payments.

In general, parachute payments are compensation payments: „

  • Made to (or for the benefit of) so-called disqualified individuals. „
  • Contingent on a change in control. „
  • In excess of a specified amount.

The Golden Parachute Penalties generally do not apply if a disqualified individual’s parachute payments are less than the safe harbor amount of three times the individual’s base amount (the base amount is the average annual taxable compensation for the five years preceding the year of the change in control).


If the aggregate payments exceed the Section 280G/Section 4999 safe harbor, then all amounts in excess of one times the individual’s base amount are generally excess parachute payments subject to the Golden Parachute Penalties.

Painful Details

Exceeding the safe-harbor amount results in adding the non-deductible Section 4999 excise taxes onto the income taxes.

Before excise taxes, the income taxes are usually forty or fifty percent.  If the executive safely received one mil less than the safe-harbor limit (equal to three times the base amount), then net of income taxes, the executive could retain about 150% to 180% times the base amount after income taxes. However if the payments to executive exceed the safe-harbor of three times the base amount, a non-deductible excise tax of 20% is imposed on the excess over one times the base amount. 

An executive receiving payments of an amount exactly equal to one mil over three times the base amount would be almost exactly two times the base amount over the base amount, of course.

Two times the base amount times twenty percent excise tax equals 40% of the base amount. Not being able to deduct this cost would mean that an exec needs to earn income of about double this amount in order to pay both the amount of excise tax and the amount of tax on the earned income.

To just pay the income taxes from taxable income on two times the base amount you would need to earn two times 40%, or 80%, times the base amount or two times 50%, or 100%, depending on your individual situation.

Adding up those factors, when the executive's payments are just under the safe harbor limit, the executive retains from about 150% to 180% of the base amount after income taxes, and when the executive barely goes over the safe-harbor limit, the executive retains only 70% to 100% times the base amount after income taxes and the IRC Section 4999 excise tax.

That would be like being paid $3.00 and being able to keep only $0.70 or $1.00.

Meanwhile, the corporation cannot deduct the $3.00 payment, so it needs to earn income of about $5.00 to $6.00 to make that payment of $0.70 or $1.00.

Company Counsel: How to Deal With Them

Executives who used the company's counsel as their own learned that could not work longer-term.

Have you used the company counsel as a personal legal advisor and perhaps as a personal confidante just to save a few dollars and feel silly for the experience? Sometimes that can cause a career to crash, so you can feel grateful for not encountering that, right?

Need legal advice about your personal interests? You are well advised to be concerned. Your professional and financial futures may be in jeopardy if you make unwise personal choices.  You need independent advice relating to business or a line between business and personal.  You need to choose one direction.  You need to find peace of mind.  You need to know the alternatives and the risks before you choose the answers.

You need an attorney to deal with a company attorney.

Employers are smart when it comes to negotiating compensation.  After all, isn't their primary business objective based upon increasing the "bottom line?"  Your employer probably has an attorney, possibly in the foreground, to be sure that the terms of your deal are negotiated in its favor.  You may even know the employer's attorney, and you may feel it would be difficult to negotiate on your own behalf.

You need an independent attorney for making transitions.

In today's business climate, executives are advancing their careers more rapidly and earning more than ever before.  They probably transition from one organization to another more than five times before they retire.  Each time they make a transition, their future earnings and reputation are at stake.



 A prenuptial agreement is a contract that is signed before marriage that spells out how a couple will handle any of the financial aspects of their marriage.
Having an honest financial discussion prior to a wedding ceremony can be a very positive experience, most of the time.  With communication comes gaining knowledge and understanding of each other's financial goals and requirements.  By providing that clear understanding of each other, the communication done before marriage about finances can be important groundwork for a happy relationship long into the future.
Most couples today who come into marriage with their own investments, cash, and property bought in the years before, understand right away why a prenuptial agreement is helpful to have. For every couple, deciding how to deal with your money and assets -- whether to maintain separate or joint accounts, share deeds to homes, assume each other's pre-marital debts -- is one of the biggest challenges to newlyweds. Prenuptial agreements are one solution. Some people think these legal documents are a must because they have a major stake in how the property and income are divided. Others think they only necessary if you plan on divorcing. What I think is that some couples have very compelling reasons why having either full or partial financial independence from each other is beneficial and fairer to both of them.  Also I think sometimes it can be outright compellingly necessary to have a prenuptial agreement that shields one of the spouses from separate debts and the bad credit ratings of the other member of that couple.  We confidentially represent and advise future spouses in the context of prenuptial agreements.

D & O Insurance

D&O insurance is indispensable for publicly-traded companies. Too many private company officials find out the hard way because, they believe, they are unlikely to ever have a D&O lawsuit. Before a claim arrives from a shareholder or other third-party, it is easy to think that there would never be a claim. When they recognize they need insurance, it is too late.

Common Mistakes of Busy People

Keep Proper Corporate Records

Improper record keeping can cause problems with the IRS, hamper your ability to raise equity capital and could result in personal liability by “piercing the corporate veil” of the company.

Protect Intellectual Property

Intellectual property (patents, trademarks, confidential information, know-how) is often vital to success and building value of the company. To protect yourself, obtain appropriate registrations and licenses.

Properly Negotiate and Document Agreements

Contracts and leases presented by banks, landlords, suppliers generally are written in their favor. These are negotiable! Review all contracts carefully and ensure they meet your business needs.

Approach any Personal Guaranty Cautiously

Many contracts may require your guaranty. Your guaranties to banks, landlords, suppliers and others may expose you to a much greater personal liability. Where possible, try to avoid personal guaranties.

Select a Competent and Dedicated Counselor

A competent attorney can help you handle all of these issues, save you time and enable you to focus on the areas vital to business success.

Asked by the Press for the Company's Statement

Being in an awkward position--being asked for a comment by the press

If there is any chance of being asked by the press for your comment on a matter that affects your company, you may want to understand exactly what should be expected from you and why.

When your company is involved in a lawsuit, should you comment

You can be honest that you are not the company's spokesperson and not familiar with the name of the company's relevant spokesperson, assuming there is a suit.

Refer questions to a designated spokesperson for the matter, if you know it. The rest of the time, do not comment. Although you can be honest that you are not the company's spokesperson and not familiar with the name of the company's relevant spokesperson, assuming there is a suit.

Having no comment is unobjectionable. You also must always assume that there is or will be someone specifically instructed by the company to address press, media, the Web, investor, and other inquiries of all kinds, and that no one else can comment for the company except a person specifically designated by the company.

Even if the company is slow to name a person, you would owe the company a duty to protect its right to later name a person to address press and media on this subject.  

Moreover, you must never forget that your personal opinions should not be volunteered. Officers have a duty to protect the company, including its right to defend itself and to seek confidential advice and opinions from attorneys before offering information. That includes the obligation to prudently remain silent pending that advice being obtained and thereupon digested and understood.

Which is the only time to make comments to the press

You should only make comments to the press about your company if it is within your job description, and/or when explicitly and specifically advised to do so by a lawyer for the company and/or when specifically advised to do so by an attorney you independently engage to represent you.

Shouldn't you defend your company publicly

Truly, executives do have a duty to protect their company, and the duty they have can be fully and faithfully discharged by bringing the suit to their competent legal counsel's immediate attention. When asked by the press for an impromptu comment, the executive should remain silent and withhold any comment. After the company reviews the complaint, learns the facts and receives the legal advice it should want, it will surely designate someone for commenting to the press.

The duties are called the fiduciary duties.  They are very high standards, but even a fiduciary is entitled to fully rely upon experts like legal counsel within the area of their expertise, like responding to a suit.

Hiding the case from its own legal counsel of course would spell disaster, but being publicly open and providing comments or a "play-by-play" to the press is simply not required or advisable or customary, especially for defendants.  In fact it can be seriously deleterious to a company's due process rights and could justify a termination for cause or at least a strong admonishment and retraining of the executive.

Only if it Turns Out to be Harmful, Prejudicial, or Damaging, Can It Be Introduced at Trial Anyway

Any statement made to the public or to any party other than the aggrieved, or any statement made to an aggrieved party that is not explicitly and provably part of a settlement negotiation, can and will be used against the company during trial and, if would follow logically, against the executive, too. This is why you frequently hear, "We cannot comment on pending litigation" from defendants involved in a lawsuit. Statements of opinion by the defendant (which cannot be introduced at trial absent some good reason) cannot help.

If not the designated spokesperson, always defer

Everyone who is not designated as the spokesperson should defer to the company's designated spokesperson to make statements to press, media, or other interested persons.

Actively Guarding against Suits

Discrimination and Whistleblower cases

Discrimination cases are brought frequently by whistleblowers against executives. Whistleblowers may claim that the executive discriminated against that whistleblower. Every executive needs a good understanding, but often executives do not have a good understanding, of key employment laws in the area of discrimination suits. Discrimination is never permitted against protected persons, which now includes new classes such as whistleblowers. The Sarbanes-Oxley Act makes whistleblowers a protected class. In cases of disparaging or changing the working conditions of a whistleblower, the risk exposure would be enormous to the officer individually.

Losing Indemnification

In such cases, exposure to unindemnifiable personal risks and liabilities can be unlimited. Indemnity cannot be paid if paying indemnification would violate so-called "Public Policy" which would mean that an individual would not receive indemnification if it's against public policy for the company to pay indemnification or reimbursement.  It is against public policy, obviously, to compensate any wrongdoer, aider, or abettor, for wrongdoing. The company could be powerless to pay any indemnification.

If there is Insurance, Coverage Excludes Fines

An insurer could agree to pay the unindemnifiable amounts. Nonetheless, insurance carriers would have a complete defense to paying any claims to the extent they constitute fines or penalties.  To be sure of this, you can look inside the exclusions section of most insurance policies.

Losses may include fines and penalties that are non-deductible.

To qualify as a deductible business expense, various requirements must be met, and one requirement is that the expense cannot be a fine or a penalty imposed upon wrongful conduct by a legal authority under applicable law. Paying unlimited expenses without any indemnification and without any tax deductibility would be a crushing burden. The actual amount of gross earnings before tax that one would need to earn to pay a non-deductible expense is estimated at about 200% of the nominal amount of the unindemnified cost in order to both pay the fines and pay the taxes on the earnings.

Review Numerous Protected Classes (Federal)

  • Race – Civil Rights Act of 1964
  • Color – Civil Rights Act of 1964
  • Religion – Civil Rights Act of 1964
  • National origin – Civil Rights Act of 1964
  • Age (40 and over) – Age Discrimination in Employment Act of 1967
  • Sex – Equal Pay Act of 1963 and Civil Rights Act of 1964
  • Pregnancy – Pregnancy Discrimination Act
  • Citizenship – Immigration Reform and Control Act
  • Familial status – Civil Rights Act of 1968 Title VIII:
  • Housing cannot discriminate for having children, with an exception for senior housing
  • Disability status – Rehabilitation Act of 1973 and Americans with Disabilities Act of 1990
  • Veteran status – Vietnam Era Veterans' Readjustment Assistance Act of 1974 and Uniformed Services Employment and Reemployment Rights Act
  • Genetic information – Genetic Information Nondiscrimination Act 

Review Numerous Protected Classes (California)

See all of the Federal Protected Classes, which are provided also separately in California law in ways that do vary from Federal law in some respects.

In California, all of the following are also additional state-only protected classes.

  • Marital status
  • Sexual orientation and identity
  • Medical condition
  • Political activities or affiliations
  • Status as a victim of domestic violence, assault, or stalking

Is an Executive Protected by a Corporate Veil?

People think they are protected personally by the corporate veil when it comes to anything they do on the job, but that’s not the case.

The corporate veil does not shield an individual from personal liability for actions based on their own conduct while performing their job.

For instance, unhappy employees have a long list of possible claims against an employer. Depending upon the state law involved or the federal law they may choose, employees can bring claims that an employer discriminated based on age, race, national origin, sex, sexual orientation, or other listed factors. Executives, supervisors and human resource employees have been held personally liable on theories like failure to pay wages or overtime, failure to allow unpaid leave, failure to make pension contributions, wrongful termination, wrongful hiring, infliction of emotional distress, defamation, failure to deposit withholding taxes, and it is very worrisome to realize that certain individuals can be held personally liable on many of these and other types of potential claims.

The company may provide indemnity to its employees and agents.

If indemnity is not maximal, the executive could be left bearing substantial unindemnified costs and risks of loss.

The company may provide insurance of officers.

An executive should be familiar with the company's insurance coverage, and the Employment Practices Liability (EPL) Insurance may be more important than the Directors' and Officers' (D&O) insurance.

Employment Contracts: Negotiations and Coaching

The following is a checklist of key issues to consider when negotiating an employment agreement.

To help you to look objectively at this list, we refer to the executive to be hired in the third-person as the "person".

Being on Par with the Executives

Is this person receiving the benefits, bonus programs, insurance, and other terms of employment, being received by the so-called Executives?

Is this person promised the future benefits on par with future benefits that may be received?

Multi-Year Term

  • Is the employment “at will” which means that a change in employment terms, even a reduction in compensation, is permitted on a prospective basis, absent a binding agreement to the contrary. Or, how long is the employment term? Fixing the terms for a period of time, if compensation cannot be reduced and is guaranteed securely, is good, with caveats. But despite a multi-year term a contract can sometimes provide that the compensation can be reduced under specified conditions.  
  • Does base salary increase each year of the contract?
  • Does the executive have the right to terminate unilaterally without incurring an obligation to provide comparable replacement services?

Golden Parachute

A “Golden Parachute” is a payment to or other benefit guaranteed to a company executive in the event the executive is fired as a result of a takeover of the company:
  • In the event of a change of control of the company, is the employee entitled to terminate employment and receive the golden parachute payment?
  • What are the tax implications of the golden parachute payment?
  • Will the company also gross up the parachute payment to cover the tax?
  • Will the company reimburse the employee’s expenses in connection with an IRS audit claiming additional tax?

Base Salary

Negotiate about the initial base salary amount as much as it makes sense to do so.  Watch out for any circumstances under which the employee’s base salary could be reduced.  Some agreements give the company the right to reduce base salary up to a certain percentage if other similar situated employee salaries are similarly reduced (such as might occur when the company is in financial distress). If there is a takeaway provision in bad times, then there should be a generous giveback and profitable reward in good times, yes?


Is the bonus guaranteed, dependent on achievement of milestones, or wholly discretionary with the Board of Directors? What provisions are made in case it is earned but cannot be paid by the employer in full due to financial insolvency?  

Equity Grants

          Equity grants are often an important part of the Employment Agreement, and key issues here include:

  • What percentage of equity grant is appropriate —
    • a percentage of issued and outstanding stock or a percentage of fully diluted stock?
  • Should the grant be
    • tax advantaged incentive stock options,
    • non-qualified stock options,
    • stock appreciation rights, or
    • restricted stock units?
  • If stock options, what is the exercise price? Typically that needs to be equal to or greater than, and never to be less than, the fair market value of a share of common stock on the grant date.
  • What is the vesting period for the equity grant? A typical scenario is 4-year vesting with a one year “cliff vest,” meaning the employee must be employed at least one year before one-quarter becomes vested on the anniversary of grant and monthly vesting at the rate of 1/48th of the total grant vesting monthly over the next 36 calendar months.
  • If the employee is terminated without cause, does some portion of the equity grant get accelerated vesting?
  • Is there any acceleration of options upon an acquisition of the company? Does it require an acquisition plus a termination of the employee’s employment (a so-called “double trigger”)? 
  • How long does the employee have to exercise options after termination of employment? The typical period is 90 days. But this can vary depending on whether the termination is for cause, not for cause, or voluntary quitting by the employee to accept another job.
  • Are the shares obtained upon exercise of an option subject to repurchase on termination of employment? If so, at what price?
  • Are the shares obtained upon exercise of an option subject to a right of first refusal? If so, on what terms?


New Employment

  • Is there a signing bonus, especially if the employee would be losing options or other benefits for making the job switch?
  • Are moving expenses to be reimbursed? 
  • Is there a relocation package available?

Death and Disability

Various issues arise on the death or disability of the employee:
  • What is defined as a disability event?
  • What happens on disability? Does the employee continue to retrieve salary and benefits for some period of time?
  • What happens on death? Can medical and other benefits continue for some period for the spouse and children?

Reimbursement of Expenses

The issues regarding the right to the employee getting reimbursement expenses include:

  • Will the employee’s business expenses be reimbursed within a set time period?
  • Is there a car or car allowance,
  • cellular phone provided, or
  • other such amenities?
  • Are moving expenses to be reimbursed in the event of job-related relocation?
  • Is there a relocation package available for employee in the event of job-related relocation?

Protection for the Employee

The employee may want to negotiate certain liability protection mechanisms, covering the employee performing services within the scope of employment:
  • Does the company have Directors’ and Officers’ (“D&O”) insurance coverage?
  • Do the company Bylaws provide for indemnification protection for officers and employees?
  • Does the company’s corporate charter limit the liability of officers?
  • Is there an Indemnification Agreement that protects the employee, covering:
    • (a) Indemnification protection for claims
    • (b) Automatic advancement of legal expenses
    • (c) Protection even if the employee is no longer employed by the company? (Note statutory limitations on indemnification.)

Scope of Employment

The scope of the employment and responsibilities raise a number of issues:

  • What is the title of the employee’s job?
  • What are the employee’s responsibilities?
  • Can the employee be demoted? Can the employee’s responsibilities be substantially modified, decreased, or increased?
  • Is the employee guaranteed a seat on the Board of Directors while an employee?
  • Where is the place of employment? Can the employee be relocated unilaterally to another city, or only with the employee’s consent?
  • Is the employee allowed to be involved in other activities (e.g., a directorship on other Boards, involvement in community activities)?

Confidentiality Restrictions

The employer will want confidentiality provisions in the Employment Agreement:

  • Many companies have a separate form of employer Confidentiality and Invention Assignment Agreement that can be incorporated by reference. The employee must be careful not to use or divulge confidential information of a prior employer – the new employer will often want a covenant from the employee prohibiting such use or disclosure.
  • If there are confidentiality restrictions on the employee, are the following excluded from the definition of “confidential information”?: (a) Information that is or was publicly known, or which becomes publicly known through no fault of employee. (b) Information that is or was obtained from a third party who had the right to disclose the information without restriction. (c) Information independently derived by the employee without reference to the confidential information. (d) Information that was already lawfully in employee’s possession or knowledge prior to the disclosure of the confidential information.
  • How long do the confidentiality restrictions last?


Does the employee have a right to terminate at any time upon giving written notice? What are the effects of a voluntary termination?

Under a contract for a specified term (as distinguished from a contract terminable at-will), does the company waive any claim of damage resulting from the future need to replace the person for the balance of the employment term after voluntary termination?

The circumstances when the employee’s employment can be terminated and the resulting consequences will raise the following issues:

  • What are the specific grounds on which the company can terminate the employee?
    • (a) Conviction of a felony or any act involving moral turpitude;
    • (b) Commission of any act of theft, fraud, dishonest or falsification of an employment record;
    • (c) Breach of the employment agreement;
    • (d) Failure to perform reasonable assigned duties; and
    • (e) Improper disclosure of the company’s confidential information 
  • What are the terms for notice and opportunity to cure?
  • What are the terms concerning due process at the Board level?
  • What are the terms, if any, for compensation in the event of early termination by the company?
    • What is paid in the event of any termination, whether or not “for cause,” such as:
      • COBRA notices (not benefits)
      • Payment of accrued and unpaid vacation
      • Be sure that indemnification rights shall survive termination
    • Is employee entitled to severance pay on termination without cause? How much? Is it a lump sum or payable over time?
      • If terminated without cause, is the company required to continue paying for benefits or COBRA benefits for some period of time?
      • If employee is to receive a severance payment, the company may require the employee to sign a release of liability for the benefit of the company

Invention Assignment

Companies expect that any inventions or business ideas developed by the employee related to the company’s business during the employment period, will be owned by the company:

  • What is the scope of the company’s rights to the employee’s development of new inventions, trade secrets, and ideas?
  • Do the invention assignment provisions comply with applicable law?

Post-Employment Limitations

The Employment Agreement can address various limitations on the employee post-termination of employment:

  • Are there limitations on the employee soliciting company employees? For what period?
  • Is there a covenant not to compete after termination of employment?
    • (a) For what geographic regions?
    • (b) For what period?
    • (c) What is the scope of the covenant?
    • (d) Are the restrictions enforceable under applicable law? (Generally not permitted in California.)

Dispute Resolution

Most Employment Agreements have multiple provisions dealing with disputes between the company and the employee:

  • How are disputes resolved?
  • Should confidential binding arbitration be the exclusive way to resolve disputes?
  • In what city must disputes be brought if litigated or arbitrated? What is the governing law?

Miscellaneous Provisions

Good employment agreements have a series of “miscellaneous” clauses including those that address these issues:

  • Is there an attorney’s fees clause where the prevailing party in a dispute would be entitled to recoup its attorneys’ fees incurred?
  • Does the employee represent and warrant that his resume and information provided to the company are correct and complete?
  • Are all the terms of the employment reflected in the agreement, thus allowing a clause stating there are no other terms of the employment relationship?

Executive Separation

When executives or other high-level employees or key employees separate themselves from a previous employment arrangement, there are many potential issues on the table that are different from other employer/employee concerns. Typically, the consequences of bad decisions could be serious.

Planning a Departure

An executive, by the very nature of their position, possess and are privy to information that can be arguably categorized as sensitive trade secrets. Whether contemplating a career move to a competitor or industry partner or weighing the options of establishing their own enterprise, an executive should be mindful of many factors, including:

  • The existence and terms of any trade secrets, proprietary or confidential information assignments or agreements
  • The existence of any fiduciary or other special duties

The Severance/Separation Package

Just as when the employment relationship was entered into, the first concern is what the contract says. The executive who is on their way out needs to be assured:

  • Their interests are being protected under the appropriate legal standards but also fairly.
  • They can move forward with their future career plans without hindrance from their former employer.
  • The proposed separation agreement provides the best package that can be achieved.


Litigation should clearly be an executive’s last option to resolve disputes, but, in some few cases, there are no other options.