In this article, Swati Garg, an Advocate and an LL.M. graduate from Gujarat National Law University discusses how to draft a golden parachute and golden handshake provision.
Golden parachute as the same suggests is some kind of protection when one is falling down. In business world, merger is a major event which may lead to loss of jobs for many key employees. A golden parachute refers to benefits given to a key/top executive in case there is a merger or acquisition of the company and executive is terminated or let go due to the merger or takeover. These benefits can be in the form of cash bonus, retirement packages, a severance package, stock options, etc.
These golden parachutes can be beneficial both for the employer and employee. For an employee, it serves as security in case there is a restructuring in the company. For an employer, it helps in maintaining cordial relations and minimizing risk of legal proceedings in case there is a dismissal of an employee post-merger.
As the clauses would have already been laid out, if there is a disagreement between the top executives with the new management, it will be easy to terminate them. Moreover, these clauses also act like anti-merger mechanisms, making acquisitions more expense for acquirers. In case of hostile takeover, or any potential merger, the other party will have to consider about paying these compensations.
Golden handshakes are upgraded versions of the golden parachute. They include better incentives and cover a lot more scenarios unlike the golden parachute where incentives are given only in the case of a merger or acquisition. Golden handshakes can be defined as incentives given to employees in case of dismissal, corporate restructuring or in case of their retirement. These incentives range from stock options, compensation, severance package, equity, etc.
Provisions of Golden Handshake under the Indian Company Act, 2013
Section 202 of the Companies Act, 2013 states the provisions for golden handshake in India. As per the section, these provisions will apply only to:
- Managing director
- Whole-time director
They will be compensated for any loss to office or as consideration for retirement. However, following are the situations where they won’t be compensated.
- If during the restructuring of the company (including mergers and amalgamations), if the managing or whole-time director or manager resigns from the office but they are hired as the managing or whole-time director or manager of the restructured company.
- If director resigns himself not in relation to above mentioned point.
- If the company is wound up due to the negligence or default of the director.
- If the director is involved in terminating his own office.
- If the director is found guilty of fraud, breach of trust, gross negligence or gross mismanagement in relation to the affairs of the company or any of its subsidiary company.
- If the commencement of the winding up of the company starts within twelve months before or after director loses his office, and the company is unable to even repay its shareholders.
Calculation of remuneration of the managing or whole-time director or manager
The payment to these key employees should not exceed what they would have been paid had they completed their term or been in office for next three years. As per section 202 of the Companies Act, 2013, this can be calculated as the average remuneration he has been getting from past three years or if he has been in the office for a shorter time, then average remuneration for that period.
It is important to note here that this section does not prohibit any other payment made to the managing or whole-time director or manager, in any other capacity.
Samples of Golden Parachute and Handshake
If Executive’s employment shall be terminated by Company, then, upon such termination, except as hereinafter provided, Executive shall be paid all accrued but unpaid base salary on the next payroll date and any accrued bonus due, and otherwise all compensation and benefits for Executive hereunder shall terminate contemporaneously with the termination of such employment, except for all Other Benefits that are accrued but unused, incurred but unreimbursed or otherwise owing, as applicable, to Executive as of the date of termination.
Provided, however, that, if such termination shall not be due to any event or circumstance caused by the executive itself which can be gross negligence, gross incompetence, willful misconduct, or any disability on part of executive, inclusive of the fact that executive has himself exercised his right to termination, then Company shall provide Executive with a lump sum cash payment equal to two times Executive’s annual base salary on the date of such termination, plus all Other Benefits that are accrued but unused, incurred but unreimbursed or otherwise owing, as applicable, to Executive as of such date. Any severance payment due to Executive pursuant to this paragraph shall be paid to Executive on the 60th day after the date of Executive’s termination of employment with Company.
If there has been a Change of Control after [date] in connection with the termination of employment giving rise to Executive’s right to receive a Basic Termination/Severance Payment, an additional amount equal to one times Executive’s annual base salary on the date Executive became entitled to receive a Basic Termination/Severance Payment. Any additional severance benefit due to Executive shall be paid to Executive on the 30th day after the date of Executive’s termination of employment with Company.
If the Term of Employment is terminated in respect of any Change of Control Termination [Comment: Change of Control can be separately defined], if and when a full and complete release of claims against the Bank and its affiliates in the form of Exhibit A is fully effective and is delivered within fifteen (15) days of termination, and provided the Executive has not instituted any suit, arbitration or other dispute resolution procedure and is not otherwise in breach of this Agreement, the Executive shall be entitled to receive as severance pay (in addition to the payment of the Base Salary through the date of termination), an amount equal to eighteen (18) months of the Executive’s then payable Base Salary, payable within five (5) days following the date the full and complete release of claims against the Bank and its affiliates in the form of Exhibit A is fully effective.
If, during a Protection Period, the Executive is involuntarily Terminated other than for Cause or voluntarily Terminates for Good Reason, the Company shall:
- Provided that the Release has become irrevocable, within 60 days following the Executive’s Termination, pay to the Executive a lump sum cash amount equal to two times the Executive’s Annual Direct Salary, subject to applicable withholdings and taxes;
- Provided that the Release has become irrevocable, within sixty (60) days following the Executive’s Termination, pay to the Executive a lump sum cash amount equal to twenty-four (24) times the sum of
- The monthly COBRA premium for the group health, dental and vision insurance in which the Executive (and the Executive’s family, if applicable) was enrolled immediately before the Executive’s Termination, and
- The monthly premium for the Company’s group life and disability insurance coverage for the Executive, subject to applicable withholdings and taxes; and
- Pay to the Executive the Accrued Obligations.
Points to remember while drafting a golden parachute or golden handshake clause
- Employer should clearly specify the grounds which will entitle an employee to invoke a golden parachute or golden handshake clause. They should also specify the grounds of termination which would not entitle an employee to claim compensation.
- Subsequently, it would be a better option for the employer to put a clause specifying that if after termination employee institutes a suit against the employer, his claim to the golden handshake or golden parachute will be forfeited.
- The employer should specify the kind of compensation/incentive which will be provided to the employee in case of termination.
- Usually the compensation provided is in monetary form. Companies nowadays are providing stock options also. But this might not be in their best interest. For example, giving 10% stock options in addition of a severance package to a top executive in case of a merger will result into paying hefty severance package and still the executive can claim a part of the ownership of the company.
Therefore, what kind of incentives have to be given should be thought clearly.
- They should also specify when will an employee get the compensation either on the termination date or 1-2 months after the termination date. Giving compensation after few months from termination can help an employer escape from providing compensation if the employee has instituted a suit.