Drafting Contracts

2 February

• Handout 1: On Language from Wall Street Journal British Left Waffles on Falklands. Awesome.
• Handout 2: Assignment #2 returned.
• Are automatic renewal terms ("evergreen provisions") a good idea? If you're trying to lock someone into something so that it doesn't have to be renegotiated, then yes. Of course, what looks like a fantastic deal now might chage with financial circumstances. 5-year renewal terms like this might not be too feasible: they imply that someone (like a contracts manager) is tracking all the dates in all the contracts that the organization has signed. If your client doesn't have this kind of system, they might want a contract that simply terminates.
• Note "at least one year" gets rid of the problem that someone might protest if notice is given early.
• Assignment will be to review an employment agreement and give recommendations about whether it's OK to sign (2-page letter).
• Some terms to consider:
  • Perks: additional benefits beyond stated salary (perquisites-- PER-qui-zits).
  • Remuneration: compensation of all sorts.
• Most of the world never signs an employment contract; most people just get an offer letter (and maybe sign it and send it back). Most people get hired without any contract whatsoever, and they default to just being "at will" employees. When employees negotiate an employment agreement, it's often to modify their at-will status, so they have some security. Employers might want this also, in order to summarize what the duties will be, what the expectations are, what the reporting relationships will be, and basically to avoid disputes in general.

  But usually, when employees want this, it's for post-employment restrictions on the employee. Also at acquisition time: buyers will enter into employment agreements with significant or key employees (most commonly these folks are also the primary shareholders, so they're often in on the deal all along).

• Drafting considerations
  • Plain English: we want both parties to understand.
  • Integration clause: this is the one and only agreement-- there are no other side agreements.
  • Ambiguity is probably construed against the employer.
• Main operative provisions:
  1. Term: when it ends, if and how it can be renewed. Generally, the employer wants to keep this short, to limit damages in the event of breach. Maybe automatic renewal, or conversion to at-will.
  2. Compensation: straightforward, but important. This will cover salary, benefits, perks, vacation, yadda-yadda. Should specify the period of salary payments (i.e., not less frequently than monthly). But you'll want to leave room for changing all of this (esp. benefits packages) from time to time.
  3. Termination Clause: generally a list of factors that materially adversely affect the employer, refusal to follow direction from the board, fraud, etc. Employees want it to be as difficult as possible to prove cause, while employers want to preserve their options. Example: conviction of a crime (should this be all crimes, or just felonies, or should we exclude traffic violations, etc.).

     You might have severance pay provisions here as well; release of all claims by employee, etc. Employers, obviously, want to have this as small as possible, because employees will negotiate up from here.

     Some folks (e.g., executives) will negotiate a provision where if certain changes are made (e.g., relocating HQ to Buffalo, major change of reporting relationship or job duties), they get to continue collecting their salary as though they were fired without cause.

  4. Job duties and position descriptions: some of these are pretty common-sense (i.e., "CEO" speaks for itself, pretty much), but for lower executives, defining authority might be more important. Maybe incorporate the job description from the hiring process by reference, but make it clear that no list is exhaustive, in order to preserve options.
• Keep § 162(m) of the Internal Revenue Code in mind: no compensation over $1M unless it is performance-related.
• If the employee has some overriding concern (e.g., about not being forced to relocate; whether they're allowed to serve on the board of the United Way, etc.), that should be resolved in the employment agreement, along with how much time the employee is permitted to devote to these other activities. The duties of a board of directors-- especially in a publicly-held company-- are becoming more onerous, just incidentally, and people are less willing to do this.
• Restrictive covenants: these provide for the company what the severance benefits do for the employee. They're governed by state law. Should address the scope of the business, the geographic area, and the time period: non-compete. Courts are reluctant to enforce overly-restrictive non-competes. It's a restraint of trade, so it's disfavored. They're often only enforced if they're reasonable, or to the extent that they are reasonable. Note that non-competes are part of an acquisition transaction, they're more likely to be deemed reasonable (i.e., this was an essential part of the deal).

  Covenants not to solicit the employer's customers (including customer lists are property of the employer, etc.).

  Covenants not to hire away existing employees.

• You might find arbitration provisions there also; the employer might think this is a good idea.
• Some employers want a warranty from the employee that he/she is free to enter into the agreement (i.e., is not subject to an agreement that would make this employement amount to tortious interference with another business).
• Golden parachute provisions: if there's a takeover, the executive gets some fabulous compensation (designed to deter takeovers).
• And a confidentiality provision, of course. Intellectual property ("shop rights" rule).
• Boilerplate: governming law provision (specifies what state law covers things like the non-compete).