Golden Parachute or Lead Balloon? -- Recognizing Risks of Severance Agreements

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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.

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