I founded Linden Law Partners, LLC, a boutique business law firm focused on M&A, private equity and executive comp.
The recently filed Oliver Luck v. Vince McMahon lawsuit is a high-profile case between nationally known businessmen (particularly McMahon), but there are everyday takeaways that can serve any company or executive well when negotiating high-stakes employment contracts. Namely, Luck v. McMahon illustrates how important the “cause” (and often related “good reason”) definitions and their associated payout and recovery provisions are in employment contracts for both companies and executives.
Short Case Overview
On April 16, 2020, Oliver Luck, the former commissioner and CEO of the now defunct XFL professional football league, sued Vince McMahon, the owner of the XFL and chairman and CEO of WWE, for breach of contract. Luck’s employment with the XFL was terminated on April 9, 2020, and the XFL holding company that was the party to the contract has since filed for chapter 11 bankruptcy.
The XFL alleges that Luck’s termination was for cause as a result of:
1. A failure to devote substantially all of Luck’s business time to the XFL following the COVID-19 outbreak.
2. Luck’s gross negligence in permitting the XFL to sign wide receiver Antonio Callaway without informing McMahon, allegedly in violation of XFL’s policy against hiring players with questionable or problematic backgrounds.
3. Luck’s misuse of his company-issued cellphone for personal matters.
Luck, of course, is disputing each of these claims in turn with his own set of facts, arguing that the XFL’s claims were “pretextual and devoid of merit” and that the termination of his contract was wrongful and “without cause.”
Luck seeks damages of $23.8 million, which he is contractually owed if terminated “without cause.” Conversely, Luck is owed little to nothing for a “cause” termination. Notably, Luck also obtained a personal guarantee from McMahon of the XFL’s payment obligations under the contract. Luck’s contract, along with other executive contracts, was rejected in the XFL’s bankruptcy case. However, because of the personal guarantee from McMahon, Luck can seek recovery directly from McMahon, who is a billionaire.
The Implication Of ‘Cause’ In Executive Employment Contracts
Most executive employment contracts lay out negotiated reasons or occurrences that give the company a right to terminate the executive’s employment for cause. Typically, the termination of an executive’s employment without cause will trigger severance and potentially other payment or benefit obligations. However, a termination with cause typically means the executive receives little to no compensation post-termination.
Therefore, a thoughtfully negotiated and well-drafted definition in employment contracts regarding what is and is not “cause” is critical for both companies and executives. Companies will generally seek more broad and subjective definitions, while savvy executives will attempt to narrow the meaning. For executives, in particular, terms that are subjective or open-ended, such as “failure to comply with directives ascribed by the board” or “failure to achieve company success as determined in discretion of board,” will make it easier for the company to validly claim a cause termination under nebulous circumstances. The most well-advised executives with the leverage to command it will often narrow cause to circumstances that would be highly difficult for the company to invoke. For example, limiting cause to “fraud,” “felonious conduct” or some other egregious action that is unlikely to occur provides executives with heightened assurances that if they are terminated for general performance or business reasons, they will still receive their negotiated severance or other termination benefits.
The contract must also set out specified payment obligations for termination scenarios. Virtually any termination, with or without cause, will provide for payment of accrued benefits through the termination date. But other payment types, such as bonuses, accelerated vesting of equity interests and healthcare reimbursements, are highly negotiable. In employment contracts between founders and acquiring companies in M&A deals (in which, for example, a financial or strategic buyer purchases a startup and employs the founders post-acquisition), the executive/former founder should negotiate for the acceleration of payments owed to the founder as part of the acquisition transaction if they are terminated by the acquiring company without cause after the deal closes. Examples of these types of accelerated payments may include purchase price earn-outs, promissory notes or vesting of rollover equity.
When Considering A Guarantee Of Payment
Luck was smart to negotiate for a personal guarantee of payment from McMahon, especially given the amount at stake and the business risk Luck was taking with the XFL in lieu of other lucrative and more surefire positions likely available to him. Executives might consider negotiating for corporate guarantees from parent companies with ample resources in cases where established companies purposefully set up new entities for new business lines (which happens all the time as part of customary corporate legal structuring). If the contract is with a newly established entity, regardless of the overall financial wherewithal of a larger corporate conglomerate, the risk of actual payout of severance benefits is greater absent a guaranty by a parent or other corporate affiliate with a stronger balance sheet. Given the current economic climate, expect more hotly contested negotiations over personal and corporate-level guarantees in executive employment contracts.
While no contract is so ironclad to be immune from a lawsuit, Luck v. McMahon provides a timely reminder for companies and executives to take a closer look at the scenarios under which their employment contracts can be terminated and the companies’ payment obligations arising from those different scenarios. Given the current economic climate, executive employees should also investigate how to mitigate the financial risk of obtaining separation benefits in the event of their termination without cause.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
No CommentsLeave a comment Cancel