Attorneys at Law




What About Bob? – Handling Issues and Agreements for Executives in M&A Transactions


Download pdf of this article

What About Bob? – Handling Issues and Agreements for Executives in M&A Transactions

Prepared and Presented by: Jeffrey B. Oberman


In mergers and other acquisitions (“M&As”), both the buyer and the seller are routinely represented by separate counsel.  However, what is best for their clients is not necessarily best for the seller’s executives, who may or may not be going forward with the new entity. The seller and its management may even have adverse interests, regardless whether the acquisition is friendly or hostile.

Further, negotiations of individual agreements relating to the executives in these transitions often get postponed until long into the main deal negotiations.  Then, the executives are pressured to sign agreements, which match up to commitments, conversations and perhaps letters of intent, which did not involve them and may not be in their best interests.

M&As are a fact of life, and the potential should be anticipated. This article reviews – from the executive’s perspective – possible issues and agreements that may impact executives prior to and at the time of an M&A.


There are four periods where executives have the opportunity to negotiate agreements  that may relate to M&As: beginning of employment; during employment before knowledge of the possible M&A; with the seller when the executive learns of the possible M&A; and with the buyer, as part of the M&A transition.


If possible, executives should prepare for the possible impact of an M&A in all of their employment-related agreements, beginning with the very first employment agreement they reach with their employers.

A. Term of Agreement. Regardless whether there is a specific term, an initial term with anticipated renewals or no term at all, and even if the agreement is expressly “at-will,” the executive should insist on post-termination benefits under at least some circumstances.  The executive may want to trigger several benefit (stock option vesting, etc.) acceleration provisions, severance and/or other post-termination provisions in the event the relationship is terminated by the employer without Cause (discussed later), by the executive for Good Reason (discussed later) or as a result of a Change in Control (discussed later).

B. Duties. Employers typically want to describe the initial titles and duties, but have the title and duties be flexible so that it may be changed from time to time by the employer.  Employers also typically want to maintain the sole authority to make changes in the executive’s jobs and duties.  From the executive’s standpoint, material changes in job title or duties, which are often triggered by M&As, may not be agreeable.  Although it is reasonable to grant the employer a right to make good faith changes in jobs and duties, at some point, an executive should assert that it triggers an option for a Good Reason resignation.  The executive should preserve the argument that there was a substantial change in job title and/or duties, thereby triggering a termination without Cause, a resignation for Good Reason or a job decrease due to a Change in Control – and all of the resulting compensation and benefits.

C. Base Salary. Executive agreements typically set the base salary for the first year, with an understanding that the salary will be subject to annual review. Some agreements state that the base salary will never drop below a certain floor during the entire course of the agreement; some guarantee minimal percentage increases each year; some make no guarantees whatsoever.  The executive should attempt to lock in a minimum percentage increase each year, or at least a floor.  Again, this may set the stage for a later Good Reason resignation or a job decrease due to a Change in Control – and all of the resulting compensation and benefits.

D. Other Compensation, Reimbursements and Benefits. Executives often have unique compensation packages. In addition to base salaries and basic benefits, the compensation package may include intricate bonus plans, incentive compensation plans, separation or severance plans, stock grants, stock warrants, stock options, etc.  The executive may want to set minimum expectations/obligations, and make it clear that if certain awards are not reached, the executive has a right to resign for Good Reason.  Also, the employment agreement and applicable plan documents should contain language which provides acceleration clauses (e.g., accelerating vesting schedules), in the event of a termination without Cause, a resignation for Good Reason or a job loss due to a Change in Control.

E. Protective Covenants. The employer will want to protect its trade secrets, prevent unfair competition, and prohibit the solicitation of its customers and/or employees if a key executive departs.  The executive should try to avoid (or at least narrow) non-compete obligations if there is a termination without Cause, a resignation for Good Reason or a job loss due to a Change in Control.

F. Termination. The agreement should anticipate and address all likely reasons for termination of employment. The parties may have a very different view about post-termination packages and obligations, depending on the reason for and timing of the departure.  It is better to have a road map for the different options than to leave items vague or open, and subject to later disputes.  With reference to possible M&As:

1.            Termination by Company for Cause.  Most agreements make it clear that the employer can terminate, at any time, for Cause.  If the executive truly did give Cause to terminate, and particularly if it was a serious act of misconduct, employers do not want a contractual commitment to make post-termination payments.

Executives should make sure they can live with the definition of Cause.  Various types of misconduct, illegal activities, intentional breaches of the agreement, etc., will often be included in the definition.  Employers often want the definition of Cause to include less heinous actions of the executive that would, nevertheless, justify a termination, or even to simply be any good business reason (which may relate to an M&A).  Executives prefer Cause only in situations that are under their control.  Certainly, an M&A should not be Cause.

A definition of “Cause,” which many executives can accept, is:  “Executive’s willful or grossly negligent, and repeated, failure or refusal to perform or observe Executive’s material duties, responsibilities and obligations to Company; the misappropriation by Executive of Company’s funds, properties or assets; fraud or other material dishonesty with respect to Company; conviction of a crime constituting a felony, including the entry of a plea of guilty or no contest by Executive to a charge of a crime constituting a felony; or a material breach by Executive of this Agreement.”

2.            Termination by Company without Cause.  Employers who enter into executive agreements usually also want to reserve the right to terminate “without Cause.”  They want to keep all of their options open, and do not want to prove Cause every time they want to part ways with the executive.

Terminations without Cause are the situations that executives are most concerned about.  What if the employer decides to terminate the employment relationship due to a change in business plans, a down turn in the market, a mere personality dispute, or some other reason why “it’s just not working out?”  Here, a good argument can be made for post-termination payments.  Through no serious fault of the executive, the employment relationship is ended.  Accordingly, it is not uncommon for employers to agree to provide post-termination pay to executives who are terminated without Cause.  This may be part of an overall benefits package or may be contained within the executive agreement.

3.            Termination by Executive – Voluntary Resignation.  Employers cannot prevent an executive from voluntarily terminating employment.  However, few employers are willing to make payments to an executive who quits through no fault of the employer; they want it clear that if the executive voluntarily quits, separation payment and other post-termination obligations will not apply.  That is reasonable, if the executive truly voluntarily resigns.

4.            Termination by Executive – for Good Reason.  The executive should make it clear that a Good Reason resignation is a very different situation from a voluntary resignation.  Employers rarely offer this provision, and executives often fail to ask for it.

Even once it is agreed to in concept, there are often disagreements on the definition.  Executives generally want the ability to trigger this provision if the job materially changes after they begin (e.g., material reduction in compensation or title/duties, or forced and unacceptable relocation), or if there is other treatment that may not necessarily rise to the level of a “constructive discharge” under applicable law, but is nevertheless intolerable to the executive.  Employers generally resist some or all of these, preferring to maintain flexibility and discretion.  This is a great place to buffer the risks of an M&A.

If the executive is able to negotiate certain rights to resign for Good Reason, the severance and other post-termination payment sections may be similar, or even identical, to a termination by the employer without Cause.  An M&A may or may not trigger this provision.  For reasons discussed elsewhere in this article, an executive may even be able to negotiate far greater payments in the event of a Change of Control.

A definition of “Good Reason,” which many executives can accept, is:  “a material diminution in Executive’s title, responsibilities or duties; any reduction in Executive’s agreed compensation; a required relocation of Executive’s principal place of business; a material breach by Company of its obligations to Executive under this Agreement; and/or a Change in Control.”

5.            Termination as a Result of Other Reasons. Executive agreements occasionally address, as a separate category, the possible termination of employment as a result of other reasons.  For example, executive agreements may discuss terminations as a result of divestitures, acquisitions, mergers, or other Changes in Control.  From the employer’s perspective, this is not necessary because these types of terminations would constitute a termination “without Cause.”

Executives may want to see this type of provision set out separately, however, to set up a later provision for severance pay and acceleration of various benefits in the event of this type of separation.  Executives may also want to make it a ground for a Good Reason resignation.

6.            Separate Change of Control Consideration.  If possible, executives should try to get a separate Change of Control provision in the initial employment agreement with substantial Change of Control payments (beyond standard post-termination pay).  They are, however, rare in this context.  The language in a Change of Control provision can make future business combinations difficult, if not impossible.  There needs to be a reasonable balance between protecting executives from the sudden loss of employment and essentially making the business change impossible to achieve.  Change of Control agreements are discussed separately in Section VI below.

G. Successors and Assigns. Most employers will insist that the executive cannot assign his/her rights under employment agreements and that the employer has its rights to assign to a successor or otherwise.  From the executive’s standpoint, this is acceptable, if the employer also agrees that it will only assign rights under the agreement to the successor on the condition that the successor agrees to accept all of the obligations in the agreement (including any and all protections or other post-termination provisions that benefit the executive).


A. Types of Agreements. Executives often have unique compensation and benefits packages.  In addition to base salaries and basic benefits, the compensation package may include intricate bonus plans, short or long-term incentive compensation plans, separation or severance plans, stock grants, stock warrants, stock options, phantom stock plans, equity appreciation plans, etc.

B. Employer Reservations/Forfeitures. Regardless of the particular plan, employers typically include language that allows the employer to modify, interpret or even discontinue the particular plan.  Further, most employers include forfeiture clauses in the event of employment termination and/or in the even post-termination obligations (such as non-compete agreements) are violated.

C. Possible Executive Protections. Employer reservations/forfeitures are difficult for executives to avoid, given the uncertainties that employers have about the future. However, executives may be able to negotiate some alternatives.

1.            Minimum or Alternate Assurances. Perhaps set minimum expectations/obligations, and make it clear that if certain awards are not reached, then alternative compensation will be paid.

2.            Good Reason Trigger. Perhaps make it clear that if certain awards are not reached, the executive has a right to resign for Good Reason.

3.            Acceleration Clauses. Many compensation and benefits packages contain vesting and other conditions, which may be forfeited upon termination of employment. If possible, the executive should try to get applicable plan documents and agreements to contain language that provides acceleration clauses (e.g., accelerating vesting schedules) and waives forfeitures, in the event of a termination without Cause, a resignation for Good Reason or a job loss due to a Change in Control.

4.            Non-Compete Provisions. If acceleration clauses/forfeiture waivers cannot be negotiated, the executive should try to get applicable plan documents and agreements to provide that, in the event of forfeiture due to a termination without Cause, a resignation for Good Reason or a job loss due to a Change in Control, any non-compete obligations are void.

5.            Successors and Assigns. Here too, most employers will insist that the executive cannot assign his/her rights under compensation/benefit plans and agreements and that the employer has its rights to assign to a successor or otherwise.  From the executive’s standpoint, this is acceptable, if the employer also agrees that it will only assign rights under the compensation/benefit plans and agreements to the successor on the condition that the successor agrees to accept all of the obligations (including any and all protections or other post-termination provisions that benefit the executive).


In fact, most employers and executives do not plan long in advance for M&A possibilities, and/or do not include the executives’ desired Success Fee/Change of Control protections in existing agreements.  The discussions over agreements often don’t even come up until after the M&A discussions have started.  At that point, executives have many things to consider – and opportunities for new rounds of negotiations.

Executives of an employer that may be the subject of merger often become the focus of much pressure “to get the deal done” and “be a team player.”  This has to be balanced with the pressure that the individual has about his or her uncertain future, and the inevitable changes that will take place.  If the whole deal goes through – to the enormous benefit of the owners and risk to the executive – fairness dictates that the individual benefits as well.  In this scenario, some executives will have enormous leverage to assure they are treated well.  For good or bad, this can be a time for intense negotiations – both with the selling employer and with the buying employer.


In addition to possibly having different or conflicting interests with the owners of the company, some executives – in addition to being management – are also owners.  Regardless, most of them have contractual and other duties and rights that should be considered in the M&A context. For example:

A. Contractual. As they negotiate their agreements relating to M&A’s and contemplate their options, executives should be aware of their existing rights, obligations and duties under any and all existing contracts with the selling entity.

1.            From the executive’s perspective: what happens if the executive is terminated?  Decides to quit?  Declines to sign on with the buyer?  Goes to a competitor?  Retires?

2.            Most executives owe their employers certain confidentiality, non-solicitation, non-compete and other obligations.

B. Trade Secret/Confidentiality Laws. Regardless of the existence of agreements, the executive must comply with trade secret and/or confidentiality laws.   Minnesota common law provides protection to employers from employees that misuse an employer’s confidential information.  See Eaton v. Giere, 971 F.2d 136, 141 (8th Cir. 1992) cert. denied, 506 U.S. 1034 (1992); Electro-Craft Corp. v. Controlled Motion, 332 N.W.2d 890, 903 (Minn. 1983); the Uniform Trade Secrets Act (“UTSA”), M.S.A. §§ 325C.01 to 325C.08,

C. Interference with Business Relations or Prospective Business Relations. Minnesota courts have recognized causes of action for wrongful interference with present and prospective contractual and business relationships.  See, e.g., United Wild Rice, Inc. v. Nelson, 313 N.W.2d. 628 (Minn. 1982).  If the employee and/or NEWCO intentionally and improperly interfere with OLDCO’s current or prospective contractual relations, they may be liable for this tort.  Id. at 632-33.

D. Duty of Loyalty. Regardless of contractual obligations, all employees owe a duty of loyalty to their employers while they are employed.  See, e.g., Eaton Corp., 971 F.2d 136; Sanitary Farm Dairies, Inc. v. Wolf, 112 N.W.2d 42 (Minn. 1961); Rehabilitation Specialists v. Koering, 404 N.W.2d 301 (Minn. App. 1987). In addition to other obligations, the duty of loyalty prohibits an employee “from soliciting the employer’s customers for herself, or from otherwise competing with her employer, while she is employed.”  Id. This “duty of loyalty,” however, does not prevent the employee from preparing to leave while still employed, and in so doing, from preparing to enter into competition with the employer.  Id.  Thus, while the departing employee cannot solicit clients, copy employer-owned information, download computer-stored information, share confidential information, or divert the employer’s business, he can interview for a new job, negotiate the terms of future employment, plan for a competing enterprise, and lease office space and equipment.  Id.; Sanitary Farm Dairies, Inc., 112 N.W.2d at 48-49. Potential other opportunities can create negotiation leverage.

E. Fiduciary Duties. In addition to the duty of loyalty, executives often have additional fiduciary duties that have developed through common law.  Partners in partnerships, and officers, directors and shareholders in close corporations owe even higher fiduciary duties to the company and the other officers, directors and shareholders.  See, e.g., Triple Five of Minnesota, Inc. v. Simon, 404 F.3d 1088, 1095 (8th Cir. 2005), Westland Capitol Corp. v. Lucht Engr., Inc., 308 N.W.2d 709, 712 (Minn. 1981); Gunderson v. Alliance of Computer Professionals, 628 N.W.2d 173, 186 (Minn. App. 2001).

In Minnesota, like in most states, fiduciary duties have also developed statutorily. Regardless of the form of the business, there may also be a statute which provides for protections to minority shareholders/partners, fiduciary obligations and equitable rights and remedies.  See Minn. Stat. § 302A.251 and Minn. Stat. § 302A.361 (imposing a duty of good faith on officers of a corporation); Minn. Stat. § 302A.751 (close corporations); Minn. Stat. § 322B.833 (limited liability companies); Minn. Stat. § 323A.0404 (partnerships); and Minn. Stat. § 321.0408 (limited liability partnerships).

Although Minnesota courts have long agreed that certain fiduciary duties exist, the actual scope of the duty has not been well defined.  Berreman v. West Pub. Co., 615 N.W.2d 362, 370 (Minn. App. 2000).  Courts have “carefully refrained from defining the particular instances of fiduciary relations in such a manner that other and perhaps new cases might be excluded.”  Parkhill v. Minnesota Mutual Ins. Co., 995 F. Supp. 983, 991 (D. Minn. 1998).  However, Minnesota courts have addressed several specific situations, some of which may come into play in an M&A situation.

1.            Honesty and Disclosure of Material Facts. Generally, Minnesota courts require one who stands in a fiduciary relationship to disclose “material facts.”  Klein v. First Edina Nat’l Bank, 196 N.W.2d 619, 622 (Minn. 1972).  The fiduciary duty of shareholders in a close corporation includes the duty to disclose material information about the corporation.  Berreman, 615 N.W.2d at 371.  Material misrepresentation, such as those leading to sale of stock for less than their value, can be a breach. (Fewell v. Tappan, 27 N.W.2d 648, 654 (Minn. 1947).

2.            Conflicts of Interest. A shareholder in a close corporation has a duty not to make decisions based on personal and private interests to the detriment of the corporation.  Gunderson v. Alliance of Computer Professionals, 628 N.W.2d 173, 186 (Minn. App. 2001).

3.            Not to Compete. The fiduciary duty includes a duty not to take a corporate opportunity.  See, e.g. Diedrick v. Helm, 14 N.W.2d 913, 919 (1944). Under this doctrine, when a business opportunity related to the entity’s business is presented to an employee, he or she may not take it for personal benefit, or direct it to another person without first making the opportunity available to the entity.  See, e.g., Matter of Villa Maria, Inc., 312 N.W.2d 921, 922 (Minn. 1981).

4.            Not to Solicit Employees. The fiduciary duty may also include a duty not to recruit other employees to leave the entity.  See, e.g., U. S. Anchor Mfg., Inc. v. Rule Industries, Inc., 717 F.Supp. 1565 (N.D. Ga. 1989); Duane Jones Co. v. Burke, 117 N.E.2d 237 (N.Y. 1954); Lowndes Prods., Inc. v. Brower, 191 S.E.2d 761 (S.C. 1972).  But see Headquarters Buick–Nissan, Inc. v. Michael Oldsmobile, 149 A.D.2d 302 (N.Y.A.D. 1989) (solicitation of at-will employees by another was not a breach of fiduciary duty).

F. Shareholder Issues. The dissenters’ rights provisions of the Minnesota Business Corporation Act provide certain shareholders with the right to be compensated for the “fair value” (rather than a discounted “fair market value”) of their stock in the M&A context.  Minn. Stat. §§ 302A.471-473.  E.g., Whetstone v. Hossfeld Mfg. Co., 457 NW2d 380 (Minn. 1990).

In addition, Minn. Stat. § 302A.751 provides forced buyouts (perhaps at “fair value”) and other equitable remedies to minority shareholders in closely held corporations when the majority shareholders have acted “fraudulently or illegally” or have otherwise acted “in a manor unfairly prejudicial” toward them.  E.g., Gunderson v. Alliance of Computer Professionals, 628 NW2d 173 (Minn. App. 2001).  In the M&A context, a claim for minority shareholder relief pursuant to Minn. Stat. § 302A.751 can be joined with a claim for breach of common law fiduciary duty.  E.g., Berreman v. West Publishing Co., 615 NW2d 362 (Minn. App. 2000), rev. denied (Minn. Sept. 26, 2000).


A. Argument for Agreements. The goal is a win/win/win.  Many M&As will not take place unless the key management team makes the deal work, goes with the deal and then stays with the new entity – at least through any needed transitional period. If the executives are unwilling to make it work, it likely won’t work. If the whole deal goes through – to the enormous benefit of the owners – fairness dictates that the key individuals (who are taking major risks) benefit as well.

B. Timing. From the executive’s standpoint, the best time to obtain at least some protections in this area is well before the transaction takes place.  As discussed above, many Change of Control protections can be – but often are not – built into the executive’s employment agreement and other compensation/benefits agreements (either expressly, or implicitly as part of a termination without Cause or resignation for Good Reason discussion).  Regardless whether that has occurred, when a Change of Control is anticipated, it opens up a new round of potential negotiations – especially if the individual is key to the deal.

C. Success Fee/Bonus Agreements. It is not uncommon for employers to offer one-time payment of a success fee/bonus to executives, conditioned on a sale going through. Success fees are usually stated as a flat amount, a percentage of the deal, or a multiple of the individual’s base salary and/or other incentive packages.  They are typically contingent on the deal going forward, the executive being employed (or terminated without Cause) as of the time of the sale and other commitments and cooperation by the executive.

D. Key Terms in Change of Control Agreements. From the executive’s perspective, some of the issues that may arise in Change of Control agreements are as follows:

1.            Payments/Rights. Many Change of Control agreements provide payments/rights to individuals who do not go with the new entity.  These payments are often substantially more (double to triple) than traditional severance in a regular employment agreement.  As we continually read and hear in the news, they can be many multiples, especially if stock and other benefit plans are accelerated.  These agreements often include:

a.             Payments in lump sum, rather than over time.

b.            Acceleration of various employee stock and other benefits/rights, e.g., to avoid forfeiture or enable the person to qualify for early retirement.

c.             Indemnification and tax gross-up provisions, in the event severance triggers golden parachute tax penalties, are often provided.

d.            Assurances with respect to other expenses and benefits, such as outplacement services, financial/tax/legal planning, automobile, ongoing medical, etc. can be addressed.

e.             Executives would be well served to assure that at least under some circumstances (e.g., an involuntary termination by the seller or failure to hire by the buyer), non-compete provisions are waived, or at least narrowed to a reasonable scope and limited to a time frame that the executive is being paid.

2.            Triggers of Payments/Rights. Change of Control payments/rights are almost always conditioned upon a Change of Control.  A critical negotiation issue is what else, if anything, is required to trigger the agreed payments/rights.

a.             Single Trigger. From the executive’s perspective, it is far preferable to have the right to trigger the payments/rights if the Change of Control takes place and the executive, for any reason, does not go forward with the new entity in a comparable position.  Here, the executive can opt out of the deal for any reason, and trigger the payments/rights.

b.            Double Trigger.  Employers typically only want the change of control payments/rights to be triggered if the change of control takes place and the executive’s employment is terminated without Cause (involuntary termination by the seller or failure to hire by the buyer) as part of the M&A process.  Employers do not want their executives to be able to exclude themselves from the deal.

c.             Possible Compromises.  If the employer insists on a double trigger (both a Change of Control and involuntary termination by the seller or failure to hire by the buyer), the executive should negotiate exceptions/limitation to that, such as:

i.            The buyer has to accept and agree to any and all employment agreements between the executive and the seller, absent a new, revised agreement.  This would include any guaranteed compensation, benefits, job title, responsibilities, etc. and would also carry forward favorable definitions and rights with respect to Cause, Good Reason Resignations, post-termination payments, etc.  Then, if the buyer does not provide the executive with all rights and payments, it would trigger a Good Reason resignation as well as applicable Change of Control payments/rights.

ii.            Resignation Window.  The executive should attempt to preserve, after a reasonable transition period, an opportunity to voluntarily resign (without needing to prove Good Reason), and still trigger the payments/rights.  (For example, allow for voluntary termination for a one-month period after a one-year transition.)  This would enable the executive to give the buyer his/her full time energies and cooperation to help assure a smooth transition, and gives both the executive and the buyer a chance to work together long enough to determine if they want to enter into a long-term relationship.

iii.            Non-compete Issues.  The executive should try to avoid (or at least narrow) non-compete obligations if there is a termination without Cause, a resignation for Good Reason or a job loss due to a Change in Control.

VII. tax issues.

It is beyond the scope of this article to discuss tax issues in depth, but some unique tax issues that may pertain to executive compensation should be noted.

A. IRC §§ 280G and 4999 Impact Severance Packages. Large severance packages to executives, often in conjunction with early termination of employment or changes in control, have frequently been called “parachutes.”  Parachutes are often part of the negotiations with executives, and may be necessary to recruit them, retain then, or address their concerns about takeovers or other changes in control.  Unfortunately, many companies and executives do not carefully analyze the tax treatment of potential parachute plans, and risk devastating tax results.

Generally, “golden parachutes” are those that exceed the IRS threshold for excessive severance payments, which are payments that equal or exceed three times the recipient’s average salary for the prior five years.  IRC §§ 280G and 4999.  If there is an “excess parachute payment,” IRC § 280G makes it nondeductible to the payor, and IRC § 4999 imposes a 20% nondeductible excise tax on the recipient.  To the extent the employer has a “gross-up” provision in the severance agreement (essentially agreeing to pay for the executive’s tax consequences), the employer would become obligated to increase the golden parachute by an amount sufficient to offset the excise tax liability as well as the underlying tax liability.  Further, the money paid out for the gross-up itself would be taxed, requiring further payments to cover the “gross-up” on the “gross-up.”

B. IRC §§ 280G and 4999 Impact Other Compensation/Benefits. The excise taxes discussed above may apply to compensation and benefits other than severance payments.  For example, the value of any stock options or restricted stock, the value of accelerated SERP accrual investing, agreements to pay post-termination welfare benefits such as health and/or life insurance premiums, agreements to pay other benefits such as automobile or club memberships and other post-termination payments could be subject to the golden parachute taxes.  See 26 C.F.R. § 1.280G-1 (Treas. Reg. § 1.280G) (IRS Regulations pertaining to §§ 280G and 4999).

C. IRC § 409A May Also Apply. Executive compensation was complicated more by the enactment of Internal Revenue Code § 409A, which was passed in 2004 and imposed sweeping new rules on nonqualified deferred compensation arrangements.  These new rules institute substantial penalties on taxpayers who are not in compliance.

Although § 409A, on its face, deals with “deferred compensation” arrangements, it has become clear that many types of compensation, which were not necessarily considered by many to be “deferred compensation” may be subject to § 409A. Section 409A might apply to severance agreements, employment agreements, bonus or incentive plans, change in control agreements or other agreements that create an enforceable right to compensation to be paid at a later date.  If § 409A is triggered, the compensation could be deemed taxable to the employee (and possibly trigger a tax gross-up obligation to the employer) prior to the time that the money is actually paid, along with a 20% penalty on the compensation.

Section 409A generally applies to any binding promise to pay compensation in a subsequent tax year.  See IRS Notice 2005-1, Q&A-4(a).  In addition to deferred compensation such as elective deferrals or supplemental retirement arrangements, Section 409A may apply to arrangements not typically considered to be deferred compensation, such as stock option and other equity grants, severance and change in control arrangements, reimbursements of post-termination expenses and provision of in-kind benefits after termination of employment.  See Internal Revenue Code § 409A and related regulations.

D. Executive Perspective. Careful planning with a tax lawyer or an accountant is critical!  Any time a large compensation package of any sort is negotiated, the executive should consult with a tax lawyer or accountant.  Further, the executive should seek an agreement that the employer will pay for that advice, and will agree to indemnification and tax gross-up provisions, in the event tax penalties are triggered.


A. Buyer’s Perspective. Usually, the buying entity will have its own agreements, compensation and benefits packages, and will prefer to have the transferring executives enter into new agreements, which will replace any existing rights that the executive has under existing agreements with the seller. This opens up an opportunity for a whole new series of negotiations, which generally take place prior to the M&A closing.

Often, the buying entity will want the transitioning employees to come on board on at at-will basis, with few guarantees.  It will want to have a great deal of flexibility and ultimate control  in terms of what each person will do, what each person will receive and how long each person will stay employed.

Further, in order to protect its investment, the buyer will often want extensive (often several-year) non-compete agreements, which will be triggered if the employee is terminated at any time and for any reason. In the  typical employment context,  non-compete agreements context are generally disfavored. Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1983).  They are partial restraints of trade and, therefore, are disfavored by courts and will be narrowly construed.  Bennett v. Storz Broadcasting Co., 134 N.W.2d 892 (Minn. 1965); Lemon v. Gressman, 2001 WL 290512 at *2 (Minn. App. 2001). However, Minnesota law, like many other states, recognizes a distinction between non-compete agreements associated with employment contracts and those arising as part of the sale of a business. Kunin v. Kunin, 1999 WL 486814, *3 (Minn. App. 1999) (citing Bennet, 134 N.W.2d at 899).  The reasonableness of a non-compete agreement in the sale of a business context (assuming the employee also had some stock) is determined by a much more generous three-step test:  “(1) whether the restriction exceeds the protection necessary to secure the goodwill purchased; (2) whether the restriction places an undue hardship on the covenantor; and (3) whether the restriction has a deleterious effect on the interests of the general public.”  Id. (citing Bess v. Botham, 257 N.W.2d 791, 795 (Minn. 1977)) (prohibition preventing former salon owner from having “any interest in any hair salon anywhere in the United States for 11 years” was upheld as reasonable).

B. Executive Perspective.

1.            Do not give up rights under agreements with selling employer unless and until new agreements are in place.

2.            Seek all desired terms in an executive agreement (some of which are discussed in this article).

3.            Lock in term commitments, title and duties, compensation, benefit, stock, severance and other equity/incentive commitments that are at least as valuable as any that are given up.

4.            Additional items, often unique to the M&A,  should also be considered:

a.             Signing Bonus.

b.            Seniority/age/service credits to make sure the executive is slotted at an appropriate compensation and benefit level.

c.             Unique Exit Strategies.  It is inevitable that some key people who make the transition to the buying employer will not be there long term. In addition to the typical employment agreement issues (term; no early termination without Cause; right to resign for Good Reason; etc.), the executive should make sure that if it doesn’t work out, he/she can move on. This may involve a combination of  severance provisions; a reduction or limitation of non-compete provisions; the acceleration of vesting; and waiver of applicable forfeiture clauses.


Since M&As are a fact of life, the potential should be always anticipated. Executives should prepare for the possible impact of an M&A in all of their employment-related agreements, and should be ready to seek win/win/win negotiations whenever the opportunities arise.