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February 06, 2003
When to Use Golden Parachute Agreements

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align="left">Key Issue: How and when should you institute golden parachute agreements?

The Case: Campbell v. Potash Corporation of Saskatchewan, Inc., 2001 WL 86352 (6th Cir. 2001)

Seeking new business opportunities, Potash Corporation of Saskatchewan (PCS) approached Arcadian Corporation, a Tennessee fertilizer corporation, about the possibility of a merger. Arcadian was receptive and, after hearing a presentation on proposed severance plans, negotiated terms of the merger and severance agreements with PCS. The boards of both companies approved and executed the merger agreements.

Preparing a parachute

The Arcadian board also approved executive employment agreements for nine executives. Arcadian executives, Messrs. Campbell, Kesser, and Williams signed employment agreements that contained golden parachute clauses. The golden parachute portion of the severance package provided a formula to compensate senior executives in case of a change in corporate control accompanied by a material change in the executive’s position at the new company. If these circumstances prevailed, the executive could leave the company and receive an aggregate payment in one lump sum within 30 days of termination.

PCS and Arcadian filed a Joint Proxy Statement with the SEC describing the severance formula, which included incentive payments, lump-sum pension benefits, and a tax gross-up feature. However, there was andisagreement between the companies with respect to inclusion of long-term incentives in the formula and how the severance packages were to be calculated. PCS also refused to expressly assume the agreements signed by the three executives, but finally abdicated to avoid delaying closing and incurring difficulties with merger financing.

Using the parachute

Prior to closing, Campbell and Williams were offered jobs at PCS that were materially different from their jobs at Arcadian, so both terminated at closing for good cause. Kesser was released from the new company’s employ at the closing.

PCS’s refusal to make even the undisputed portions of the severance payments within the 30-day time frame motivated the three Arcadian executives to file a breach of contract lawsuit.

PCS argued that the assumption agreement was invalid because the company was forced to sign it under duress. It also argued that the golden parachutes violated public policy and challenged the inclusion of long-term incentives and payment calculations.

The 6th Circuit Court of Appeals concluded that the assumption agreement was not invalid because it was "bound up in the merger obligations." It also rejected PCS’s arguments that the golden parachutes violated public policy saying that they served a legitimate business purpose, even though they were approved at the same time as the merger.

The 6th Circuit did not entirely agree with the district court’s opinion regarding the calculations and sent this part of the claim back for further proceedings.

Note

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This article reprinted with permission by the publisher Business and Legal Reports, Copyright 2001, BLR.

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