Whether a company and senior executive are negotiating an Employment Agreement in connection with an M&A transaction or simply as part of recruiting new talent outside of the M&A context, it is important for both sides to know what to focus on when reviewing these agreements – speed and efficiency in negotiating these agreements, and keeping an eye toward the fact that while the parties are sitting across the table from each other in these negotiations, they will effectively be on the same team going forward so collegiality and partnership are key.  Here are three of the top issues we focus on when negotiating Employment Agreements.

• Compensation. This is likely the most obvious point for business folks to focus on first – is the compensation market?  Is it comprised of cash or a mix of cash and stock?  Is there a bonus or other incentive component?  If so, are the metrics for achieving the bonus objective or subjective?  The more definitive and clear the metrics are for achieving the bonus objective, the less room there is for questions down the road as to whether the metric was achieved.  That being said, even with seemingly objective metrics, clever lawyers can find wiggle room to argue about whether a metric was achieved – which is why it is critical for senior executives and the company to negotiate and thoroughly understand the scope of these provisions.  For example, a seemingly objective metric would be if the executive signs X new clients to the company within a 12-month period, then a $Y bonus would be payable to the senior executive.  However, pulling at the strings a bit, one can see how questions can arise even with this metric.  For example, what if the senior executive was a co-lead on bringing a client into the company; would that count as one of the new clients he brought in for the purposes of this calculation?  And what if the client was previously a client of the firm, ceased doing business with the company, but due to the executive’s efforts, the client has now come back to the company.  Does that count as a new client for purposes of this metric or, because there was a legacy relationship, is it not counted?  These types of details are important to carefully think through when negotiating these terms.
• Grounds for Termination. Typically, companies want to provide themselves with a right to terminate a senior executive without cause – if they do, then the company should expect that a senior executive will focus on (and potentially negotiate) how much notice is required in that case.  A sophisticated senior executive will also likely negotiate for severance in those instances – and also in the instance if she resigns for “Good Reason” (companies do not always offer a Good Reason termination; a well-advised senior executive would likely ask for it and discuss with her counsel the typical grounds that fall within this definition).  In those instances, the typical argument from a senior executive is that she was a “good actor” and should receive some form of severance upon her departure, while acknowledging that if she was a “bad actor,” the company should be able to terminate her immediately for “Cause” and forego any severance obligations.  In these instances, the company should anticipate that the senior executive will try to narrow the grounds for what constitutes a Cause termination and make these grounds as objective as possible (e.g., convicted for a felony), whereas the company will likely also want to include subjective grounds (e.g., engaging in conduct that has a material adverse effect on the company).  These provisions are some of the most hotly debated provisions in the Employment Agreement.
• Restrictive Covenants.  Employment Agreements for senior executives typically contain non-competition restrictions, as well as client non-solicitation restrictions and employee non-hire provisions.  Before delving into common considerations when negotiating these provisions, we would be remise if we did not underscore that the enforceability of non-competes are currently under attack at the federal level as well as on the state level in many states. In brief, the Federal Trade Commission (FTC) proposed a regulation this year that would – with few exceptions – abolish non-competes in the United States.  Some states have followed suit, with some state-by-state modifications to that proposed regulation.  In New York, for example, there is a pending bill that, if adopted, would abolish non-competition agreements with very few exceptions.  There are many questions surrounding that bill, including whether there will be a carve out for mergers and acquisition (M&A) transactions where a selling shareholder is employed by the acquirer (typically referred to as a “sale of business exception”) and whether the restrictions will only apply prospectively (i.e., on or after the date the bill is adopted) or also retroactively (i.e., also to agreements that were entered into prior to the bill’s adoption).  To the extent a non-compete would be enforceable in the applicable Employment Agreement, then it is critical to closely review the scope of the restricted activities, including the term (e.g., how long is the executive prohibited in engaging in these activities post-termination), the geographic location (e.g., is the executive banned from engaging in these activities statewide? Nationwide? Worldwide?) and the scope (typically, there is push and pull between the company and the senior executive as to how broad or narrow the scope of restricted activities should be and whether any activities should specifically be excluded from the scope).  In some states, even if a non-compete is not enforceable, provisions relating to non-solicitation of clients and non-hire of employees may be enforceable.  There, again, the scope of these restrictions will be hotly debated – for example, which clients is the senior executive prohibited from soliciting during the restricted period?  Anyone who was a client at any point during his tenure with the company or only those who he serviced in the past X years?  What about clients who the company made pitches to in the past Y months, but have not yet been retained by the company?  In addition to the grounds for termination discussed above, the restrictive covenants are typically the most highly negotiated provision in the Employment Agreement.