Shearman & Sterling recently obtained a substantial arbitration award of severance and other benefits for the former CEO of a public company who was terminated in connection with a change in control initiated by a group of activist investors.
Shearman & Sterling originally represented the client in connection with the negotiation of his CEO employment agreement, and the contract included enhanced severance benefits to protect the CEO in the event of a termination that occurred in anticipation of a change in control. Specifically, the client’s employment agreement provided that he was entitled to enhanced severance if he were terminated within 180 days before the date on which a change in control occurred, provided he could demonstrate the termination was at the “request” of a third party who had taken steps reasonably calculated to effect such a change in control or arose “in connection with” or “in anticipation of” such a change in control.
Although the CEO was terminated only months before the activists completed their takeover by replacing the company’s entire board of directors, the company disputed that the CEO’s termination had any connection to this change in control, and refused to honor his severance benefits. The company also claimed that the CEO had been terminated for performance reasons. As a result, Shearman & Sterling commenced an arbitration proceeding and successfully argued that the client’s termination was connected to the change in the composition of the company’s board and that the client was therefore entitled to enhanced severance under his employment agreement. The arbitrator also ruled in favor of the CEO on a number of related claims, determining that he was also entitled to a prorated bonus, health and related benefits, unused vacation compensation, and reimbursement of substantial legal fees incurred in connection with the dispute but payable by the company under the terms of the CEO’s contract. In addition, the arbitrator accepted Shearman’s arguments that the company had failed to establish that the termination arose as a result of concerns about the executive’s performance.