Archive for the ‘Executive Glossary’ Category

POWER WORD PLAY (A Term, Word, or Concept an Executive Ought to Know): MORAL RIGHTS

May 13, 2016

BY G. A. FINCH

To the uninitiated, the term “moral rights”, would at first blush (pun intended), seem to suggest having something to do with bad character, improper behavior or religious and philosophical subjects.

Actually it has to do with intellectual property rights of an author, artist, or creator beyond mere copyright interests.

Moral Rights is beginning to appear more often in employment agreement provisions pertaining to intellectual property rights.  The employer usually seeks to obtain a waiver of the employee’s moral rights to works subject to copyright which works are made by the employee within the scope of employee’s employment or using employer’s resources or confidential information.

It is a European legal concept and not rooted in American jurisprudence, although similar and analogous concepts have been asserted or litigated in the United States from time to time.  I believe burgeoning multinational corporations and global trade have facilitated the infiltration of moral rights provisions into American legal documents. The American version of moral rights became codified as the Visual Artists Rights Act of 1990 (VARA) pursuant to the mandates of the Berne Convention.

VARA provides that the author of visual art has the right:

 

A) to claim authorship of his work,

B) to prevent the use of his name as author of any visual art that he did not create,

C) to prevent any intentional distortion, mutilation or other modification of his work that would prejudice his honor or reputation,

D) to prevent any destruction of a work of recognized stature, and any intentional or grossly negligent destruction of that work is a violation of the right.

 

Under VARA, only the author of the subject visual art has these rights whether or not the author owns the copyright. VARA does not provide moral rights for authors of literary or musical works.

Black’s Law Dictionary sets out the most succinct global definition of Moral Rights:

“Moral rights include rights of (1) attribution (also termed “paternity”): the right to be given credit and to claim credit for a work, and to deny credit if the work is changed; (2) integrity: the right to ensure that the work is not changed without the artist’s consent; (3) publication: the right not to reveal a work before its creator is satisfied with it; and (4) retraction: the right to renounce a work and withdraw it from sale or display…”  Black’s Law Dictionary, p. 1030 (Eighth Edition, 2004).

 

POWER WORD PLAY (A Term, Word, or Concept an Executive Ought to Know): UNIT APPRECIATION RIGHTS

August 19, 2015

BY G. A. FINCH

Unit Appreciation Rights (for limited liability companies and known as Stock Appreciation Rights for corporations) are a form of executive compensation tied to the performance of a set amount of units or shares within a set time period.  They could include only compensation tied to the amount of increase in the value of equity,  or compensation that comprises both such increase and the original value of the equity.

The compensation may be cash payments or equity equivalent based on the original full value of a number of units that an executive holds and/or any increase in value (the difference between the price of the units at the time of grant and the price of the units upon exercisability). When an executive exercises his right, a company’s Unit Appreciation Rights Plan may allow the company to pay in cash or real common equity of the company or a combination thereof.

The units granted under Unit Appreciation Rights are not real units of ownership in a company entity, but rather are hypothetical “Phantom Units”. The company will grant an executive a number of units, e.g. 3,000 which will have an initial price per Phantom Unit, e.g. $30.00. The units will vest after a set period, e.g. two years after the date of grant while the executive is still employed. After vesting and before any expiration date, the Unit Appreciation Right becomes exercisable by the executive either in partial amounts or in the full amount depending on the terms and conditions of the company’s Unit Appreciation Rights Plan. If not exercised during the executive’s lifetime and assuming that an expiration date has not occurred, then any person empowered under the deceased executive’s estate ordinarily could exercise the Unit Appreciation Right.

POWER WORD PLAY (A Term, Word, or Concept an Executive Ought to Know): VESTING

March 19, 2015

BY G. A. FINCH

 

As the saying goes, the only dumb question is the unasked question. Sometimes employees and sophisticated executives are unsure about the concept of “vesting.” The terms “vest” and “vested” are part and parcel of any employee benefits system. It pertains to when an employee’s right to a benefit becomes ripe and irrevocable.

 
For example, “vest” is a term that is used in describing and accessing employee benefits like retirement payments or grants of stock to employees.

 
Vesting is the time when specified benefits provided to an employee become certain and complete and are no longer contingent on the employee continuing to work for the employer.  When vested, the entitlement to the benefit becomes an absolute right.  Obviously, this right to a benefit may not mean much if the employer  becomes insolvent.

 
When an executive leaves his employment for any reason, he must scrutinize his benefits materials, employment contract, if any, and his separation agreement, if any, to ascertain what benefits to which he is entitle and which benefits have vested. If the benefits materials are dense and confusing, then he should consult his benefits or human resources department to ensure his understanding. If the employee has engaged an attorney to represent him in his separation, the attorney may also help the employee to evaluate what benefits have or have not vested.

DEFAMATION

March 10, 2012

Have you ever wondered why most Human Resources Departments are adamant in their keeping to a bare minimum the information they give out concerning a former employee’s reference checks? The information given is usually limited to dates of employment and title of positions held. Salary and compensation information is rarely and only reluctantly given when there is a written authorization and release signed by the ex-employee. The HR people’s reluctance is for good reason: avoidance of defamation lawsuits.

YOU SAID WHAT?

A couple of lawsuits involving defamation claims by executives are good reminders for employers that the involuntary or voluntary departure of executives must be done in a way that does not injure the reputation of the executive by anything that the employer says or writes.

In one recent case, a managing director of a consulting firm telephoned a client that the consulting firm’s ex-employee who was about to do work for the client was in a lawsuit with the consulting firm because the ex-employee “violated her non-compete agreement.” An Illinois appellate court reversed the lower court’s dismissal of the ex-employee’s claims of defamation and held that “[t]he alleged defamatory statement was alleged with particularity, was not substantially true as a matter of law, was not reasonably subject to an innocent construction, and was not subject to the fair report privilege.” Huron Consulting Services LLC v. Murtha, et al., Appellate Court of Illinois (1st Judicial District 2012). The case is still pending so we do not know whether the ex-employee will ultimately prevail on the merits.

In another 2011 Illinois case, an executive did prevail in his defamation suit against an individual member of his former company’s supervisory board and against his former company. In that case, the board member walked into the president’s office and fired him. The fired executive called in a human resources employee as a witness and asked the firing board member to state his reasons for firing the president. The firing board member replied “for cause” and further answered “yes” to the president’s query: “You are telling me that you are firing me for gross insubordination, for gross misconduct, for gross negligence and willful violation of the law?”. Leyshon v. Diel Controls North America, Inc. et al., Appellate Court of Illinois (1st Judicial District 2011). The Leyshon court stated, “It was a reasonable inference from the evidence at trial that plaintiff’s termination for cause had become public knowledge and prevented the plaintiff from obtaining comparable employment.” This appellate court upheld a jury award of $2,000,000 in compensatory damages and $6,000,000 in punitive damages. Ouch!

WHAT IS DEFAMATION?

A statement becomes defamatory when it injures a person’s reputation. The elements of a defamation claim are 1) the statement is false, 2) the statement is made in an unprivileged publication to a third party, and 3) the publication damages the plaintiff.

Where a statement is defamatory per se, a plaintiff need not plead or prove damages to plaintiff’s injury to his reputation. As the court in the Huron Consulting case noted, Illinois law has five categories of defamatory per se statements: (1) those imputing the commission of a crime; (2) those imputing infection with a communicable disease; (3) those imputing an inability to perform or want of ethics in the discharge of duties of office or employment; (4) those that prejudice a party’s trade, profession, or business or impute lack of ability in the party’s trade, profession, or business; and (5) those imputing fornication or adultery.

Accordingly, making statements about an employee’s inability to perform, lack of integrity, or lack of ability in his trade, profession, or business without substantial evidence of its truth can land an employer and its management in very hot water.

If an employer is going to fire someone “for cause,” the employer better well have good factual documentation establishing cause. As the Leyshon case discussed above shows, an employer would be foolish to use “for cause” as a subterfuge to avoid severance payments required under an employment contract. Unless the executive’s conduct is so egregious that paying severance is not a public relations option, sometimes, it is better not to state a reason and simply pay.

If an employer has a non-compete claim, a non-solicitation claim, and/or a breach of confidentiality claim against an employee, it is best to let the lawsuit speak for itself. If the employer feels compelled to say anything to third parties, then it should be simply that there is a lawsuit alleging these claims that is of public record. To state that an alleged violation is “fact” leaves the employer vulnerable to a lawsuit and possible liability. The best employer statement to make is “No comment.”

TAKE AWAYS

For the employer, the lesson is that any departure of an employee must be tightly managed so that no one in the company makes a disparaging statement about the employee that could result in a defamation suit. An employment attorney and a seasoned HR professional should manage the mechanics of the employee’s exit and any existing issues like possible violations of restrictive covenants.

For the departing executive, the lesson is that the executive must remind the employer that the executive does not expect and will not tolerate the employer making untrue disparaging statements. Sometimes a communication from the executive’s attorney is needed.

POWER WORD PLAY (A Word, Term or Concept an Executive Ought to Know): CONSIDERATION

September 9, 2010

 

Because this is a blog that discusses both employment agreements and severance/separation agreements, which are contracts by another name, an executive can benefit from understanding some basic contract concepts.

One of these concepts is “consideration.”  A valid employment contract must comprise the elements of offer, acceptance, and consideration.

Consideration is a legal concept and is the bargained for exchange of promises or performances.   “The test of a sufficient consideration is whether the act, forbearance or return promise results in a benefit to the promisor or a detriment to the promisee.”  (Laurence P. Simpson, Contracts 2nd Edition, p. 80).

In an employment context, sufficient consideration to support an offer of employment would be the obligation to perform services by the employee and the obligation to perform wages/benefits/ and other compensation by the employer.

In a severance agreement, you may see a clause that reads something like this: “In consideration for signing this Agreement and complying with its terms, Employer agrees to pay Employee a total sum of $xxxx.”  

The Severance Agreement might state further that the parties agree that the contract clauses pertaining to severance payment and other compensation/benefits constitute sufficient consideration for this Agreement 

Like all contracts, the terms of an employment agreement must also be clear and definite.  Of course, we are not trying to turn our readers into lawyers as we have too many as it is.  Now when you hear a lawyer discussing contract issues and she says “there is a lack of consideration,” you will now know she is not complaining about some rude person.

POWER WORD PLAY (A Word, Term or Concept an Executive Ought to Know): CLAW BACK

May 17, 2010

Did you know that the Chairman and CEO of United Health Group, Inc. had to give back $468 million in cash bonuses, sold stock, and remaining stock options?   Because of the purported misconduct of options backdating, his compensation was “clawed back” from him by the powerful paw of the U.S. Securities and Exchange Commission in a 2007 settlement agreement. This occurred even before the current ongoing controversy over perceived excessive executive compensation in our recent times of near economic global implosion.

What the Company Giveth, It Taketh  Away

The tool of using “claw back” provisions in executive compensation plans and employment agreements is increasing.  As the term suggests, a claw back provision, under certain conditions, permits a company to demand repayment of compensation previously paid to executives.  Those conditions usually involve compensation paid to executives based on performance measures or factual circumstances that turn out to be inaccurate, false, or fraudulent. An example is where earnings are misstated and those earnings were used as a justification, validation or trigger for a performance bonus or other compensation.

Sarbanes-Oxley

The statutory genesis of the claw back against the hapless United Health Group CEO is Section 304 of the Sarbanes-Oxley Act of 2002.  This law, among many other things, made CEOs and CFOs of companies that must comply with any financial reporting requirement under the securities laws, liable for repayment of compensation or profits received based on misstatements necessitating an accounting restatement.

TARP

Corporate reform activists as well as such 800-pound gorillas like TARP Pay Czar Kenneth Feinberg, the US Treasury Department’s specialmaster,  clamor for the utilization of claw back provisions as a means of protecting shareholders and taxpayers  from reckless, dishonest, or avaricious  executives whose actions could destroy a company or wreck an economy – think Enron and AIG.  (TARP is an acronym for Troubled Asset Relief Program, our US government financial bailout for companies that were deemed too big to fail.)  Of course, a reckless, dishonest or avaricious executive is all in the eyes of the beholder – it may or may not be true.  Fortunately, for the executives of companies who have received TARP funds, Feinberg has been hesitant to invoke his claw back powers.

Both boards of directors and CEOs must get used to the idea of claw back provisions as their application and implementation may be becoming the norm a lot quicker than they anticipate.

Squeaky Clean

Parting word: An executive’s ethical behavior and utmost integrity are the best ways to claw proof the executive’s compensation.

POWER WORD PLAY (A Word, Term, or Concept an Executive Ought To Know): RESTRICTED STOCK

April 24, 2010

When you peruse the financial media and see articles on executives and their compensation, you will often see the term “restricted stock.” In the executive compensation context, restricted stock is a grant of stock that may vest immediately or over time and may or may not be tied to performance measures like year-end profitability.

Restricted stock is usually given as part of a compensation package that will include base salary and other benefits.   For example, John Thain, who lost his position as the former CEO of Merrill Lynch, took a job in February as the new CEO of CIT Group, the middle-market financial company.  He is being paid a salary of $500,000 and 180,000 shares of restricted stock valued at $5.5 million as of February of 2010.   Thain’s stock will vest over several years.

Because the executive usually must be employed for a period of time for the restricted stock to vest, this is a tool for a company to obtain a degree of commitment and longevity from an executive.  It can also be used to make whole an executive who has given up benefits and compensation from his old employer to take a job with a new employer.

Although still widely used, stock options have come under criticism for contributing to risky economic or short-term-quarterly-profit-maximization behavior. There seems to be an increasing use of restricted stock.  For example the 23 March 2010 Wall Street Journal noted that TARP Pay Czar Kenneth Feinberg, the US Treasury Department’s special master, “has sought to limit cash payment at the firms he oversees, requiring that employees get the bulk of compensation in restricted stock tied to long-term performance.”  TARP is an acronym for Troubled Asset Relief Program, our US government financial bailout for companies that were deemed too big to fail.

POWER WORD PLAY (A Word, Term, or Concept an Executive Ought To Know): TAX GROSS-UP

February 23, 2010

A tax gross-up payment is made by an employer to an employee for any tax liability or penalty an employee incurs because of income, benefits, or perks the employee receives from the employer.  This reimbursement by the employer is to make the employee whole concerning the employee’s compensation by ensuring the employee nets the full benefit of the compensation intended.  Employers have applied tax gross-up payments to compensation and perks ranging from severance payments to club memberships.  Corporate reform activists have criticized tax gross-ups and many companies have eliminated them.