Golden Parachute or Lead Balloon? Recognizing Risks of Severance Agreements
Lane Powell Shareholder Gordon Crim authored an article in Community Banker magazine’s summer 2012 issue titled “Golden Parachute or Lead Balloon? Recognizing Risks of Severance Agreements.” In the article, Crim discussed severance payments and the FDIC’s adoption of Part 359 in 1996, which regulates the payment of severance to an institution affiliated party (“IAP”) and prohibits any “golden parachute payment” by a troubled institution to an IAP. He also discussed the fact that many employment agreements between a bank and its IAPs require it to provide for severance, but do not contemplate the potential applicability of Part 359.
Your bank has been rated “less than satisfactory” (or worse). The bank has agreed to a Memorandum of Understanding with its primary regulator, such as the Federal Deposit Insurance Corporation (“FDIC”), or a Consent Order has been entered, making bank examinations more frequent, and relations between the board of directors and senior management tense. Under these circumstances, one or more senior executive officers may part company with the bank, either voluntarily or not. Individuals in these positions may have previously entered into employment agreements that, among other things, provide for payment of compensation upon termination of employment, often in the form of continued salary, insurance coverage and other benefits. Before sending the executive off with a parting gift, such as money or the company car, consider this: payment of termination benefits (“severance”) is generally prohibited by FDIC regulation under the circumstances described above, but failure to pay may give rise to breach of contract claims by the individual who does not receive the promised benefits. Contract disputes on this issue occur with increasing regularity and can result in significant expense regardless of the outcome at trial. Boards of directors must recognize the risks associated with severance agreements and should take steps to avoid potential costly litigation.