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Fifth Circuit Court of Appeals Decision Should Serve as an Important Reminder for Employers

On Behalf of | Oct 23, 2018 |

A recent case in the Fifth Circuit Court of Appeals, Sellers v. Minerals Technologies, Inc., should remind employers to carefully approach the termination of executives, in part because concepts of fairness, as well as strict contract interpretation, tend to drive the adjudication of disputes. In this case, following a stock purchase, a target company’s executive indicated a desire to leave when his employment agreement was scheduled to expire. The purchaser responded by terminating the executive’s employment one month beforehand, thereby preventing him from vesting in $425,000 of long-term incentive (“LTI”) benefits provided for under the agreement.

The court set forth two reasons for deciding in the executive’s favor. The first ground for the court’s decision reflects a straight contract law analysis. Specifically, the court indicated that the employment agreement included a 30-day notice provision which, when applied to the executive, delayed the effective date of his termination until after he had vested in the right to collect the LTI benefits.

The second ground for the court’s decision, however, seems to reflect an equitable consideration, through the following reasoning:

Under Texas jurisprudence, if one party prevents another from performing a condition precedent or renders its fulfillment impossible, then the condition may be considered fulfilled. Here, if Defendants effectively terminated Sellers’s employment in December 2014 (as opposed to in February 2015), as they suggest, then they unilaterally prevented fulfillment of the condition at issue and cannot rely on nonfulfillment to deny the LTI benefits otherwise contractually due to Sellers.”
Read literally, the foregoing suggests that a service-based vesting schedule can be deemed satisfied when an employer “frustrates” vesting if an executive is terminated without cause. While that seems wrong on cold contract grounds, it seems to reflect the court’s sense of equity and justice on the facts at hand.

Overall, employers should be extremely careful when pursuing, structuring, and implementing executive terminations at or near vesting events. The Fifth Circuit’s decision is not an aberration: equity does seem to tip the scales of justice in cases of this kind.