Waivers & Executive Compensation

The advice that executives should read all documents related to their compensation packages before signing remains sound, especially in light of a recent court ruling. In Nye v. Ingersoll Rand Co., the court found that executives were entitled to benefits from two different incentive plans that they had enrolled in, despite the claim that their entitlement under the initial plan had expired. Civ No. 08-3481, 2011 U.S. Dist. LEXIS 50258 (D. N.J. May 10, 2011). The result of this case is important for two reasons. First, you may be entitled to benefits based on the specific terms of an agreement, regardless of any representations to the contrary. Second, the positive result for the executives is unlikely to be repeated, as institutions and their counsels heed the warnings of the case and include more clearly defined waivers in their offers.

A hypothetical example based on the facts of Nye. Let’s say a Board of Directors of a company wants to solicit merger offers. As part of its efforts to entice suitors, the Board devises an incentive plan that offers benefits to executives remaining with the company following its acquisition. This plan is aimed at making the company more attractive by encouraging key executives to undertake efforts to increase the value of the company and continuing to retain such executives following its acquisition. Under the terms of the plan, the company awards enrolled executives cash compensation in an amount tied to the final purchase price. The plan contains a clause making it effective until the company is acquired and does not contain a limitation on the length of the plan, nor does it provide the right for the company to unilaterally cancel it. The executives complete the appropriate paperwork and are enrolled in the plan. However, the company does not immediately receive any interest from other institutions and decides to cease its merger efforts.

Four years later, the company receives a merger offer. In response to this offer, the target company creates a second incentive plan to prevent the retirement or defection of executives from jeopardizing the potential merger. The target company announces to executives that the prior incentive plan is no longer in effect. The target company then offers executives the option of enrolling in the new incentive plan. In the enrollment documents for the new plan, no portion suggests that the executives forfeited any rights by enrolling. The merger of the companies is eventually finalized.

Following the merger, the combined company makes payments to executives enrolled in the new incentive plan, but does not make any payments under the prior incentive plan. Enclosed with the benefit check, under the new incentive plan, was a statement from the combined company informing the executive that by endorsing the check, the executive agrees that the “payment represents payment in full for any and all amounts owed to you under the Program and its predecessors.” The executives sue the company to recover the benefits owed under the prior incentive plan.

What does the court say? The court finds that the language of the prior incentive plan was “perfectly clear,” that the prior plan was effective until the company was acquired, and that the prior incentive plan remained valid. Moreover, the court finds that the subsequent incentive plan did not present the expiration or surrender of the benefits under the prior incentive plan as a term or condition of the subsequent incentive plan. Rather, the court notes that “[the company] is a sophisticated entity represented by sophisticated counsel.”

Further, the court notes, the company had the opportunity and the ability to condition the receipt of benefits under the subsequent incentive plan on the release of benefits under the prior incentive plan, and to draft language to that effect. Based on the failure to include such a provision, there was no release, waiver of rights, or accord and satisfaction that divested the executives of their interest under the prior incentive plan. Even the purported release that accompanied the payment checks, due to the absence of a reference to the prior incentive plan by name, failed to provide sufficient clarity to warrant a finding of accord and satisfaction. Thus, the executives are entitled to benefits under the prior incentive plan.

What does this mean to you? The practical impact of this case for executives extends beyond the facts considered. In light of the court’s decision, it is likely that companies will be overly cautious in ensuring that some form of release or waiver language is present in the terms and conditions of enrollment for any incentive or compensation plan. While simple boilerplate language may be sufficient to alleviate the company’s concerns, the potential exists that the receipt of benefits could be conditioned on a waiver that the executive has not evaluated in full.

In reviewing the rights and benefits forfeited by participation in certain incentive or compensation programs, executives should give special consideration to the financial ramifications of enrollment. In Nye, the subsequent incentive plan offered benefits that were inferior to those under the prior incentive plan. If a valid waiver existed in the subsequent incentive plan, executives could potentially have received a lesser benefit by enrolling in the later plan.

Finally, the case is instructive in that executives must be cautious to exercise their own independent review of any enrollment documents, and not rely upon any summary descriptions. If the executives in Nye had relied on the description provided to them, they would not have received benefits under the prior incentive plan and would potentially have left significant compensation on the table.

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