Navigating Past Clawbacks to take a Competitor’s C-level Job Offer
For many C-level and senior executives, non-compete covenants are reinforced not only by injunction and “golden handcuffs” but by severe company clawback rights that can pose a significant and even crippling financial hazard to executives who want to leave or even test the waters with a competitor. If you are a C-suite or senior executive in that situation, being courted by a competitor company and fearing the potentially huge costs of making the move, how can you explore the opportunity and still protect yourself? This article shares some of the author’s techniques representing C-level clients in major US corporations under just these circumstances.
Injunction and Golden Handcuffs
At many major US corporations, self-help protective actions are taken to deter C-suite and senior executives from crossing over to direct competitors.
Certainly, a company can seek an injunction but those are not always enforced depending on the judge, jurisdiction and state law. Often the issue may turn on how the company’s trade secrets, IP and/or customer base will be directly impacted. Courts are loath to bar an executive from working in the field of his or her greatest expertise. So, a strong showing of harm to the company seeking to enforce the contract clause may be needed and not always available to the company.
Additionally, the company will seek to buttress its injunctive rights with “golden handcuffs” – costs to the executive of future payments that represent a “self-help” remedy to the company. This is a deterrent the company can put into immediate effect without the need to go to court with its delay and uncertainty.
Golden Handcuffs, generally consist of the executive losing a series of future payouts he or she might expect if the executive stays on the job. This is often equity, an annual bonus or other long-term incentive that is vesting, with continued vesting dependent on your continuous services which would cease on your departure.
Clawback Peril
But for many top executives, the biggest hazard to going to the competitor, is the company clawback rights. Many companies will provide annual grants of RSUs subject to a clause granting the company a clawback. The value of the RSUs or bonus must be repaid to the company if the executive joins any of the named competitors.
For an executive who has been with the company a year or two, this might be a relatively small hurdle to making the move. However, if your service is five years, ten years or even longer, those company clawback rights, if enforced by your company, could give you a financial exposure in the millions of dollars!
Since the clawback is not a non-compete covenant per se, it has a greater likelihood of enforcement. However, this is not always so. California courts will not enforce claw back provisions as impermissible forfeitures prohibited by California Code Section 16600. But even in California, a clawback provision has a greater chance of enforcement. Where the employer includes the Forfeiture-for-Competition provisions in deferred compensation top hat plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), the Ninth Circuit has upheld enforcement. ERISA expressly preempts all state laws that “relate to” any employee benefit plan.
Extent of Companies Barred
While the normal non-compete seeking an injunction or loss of future vesting will have a general definition of competing companies, the much stiffer clawback provisions are often quite specific. To enhance both deterrence and enforcement, the RSU grant or ERISA deferred compensation may list specific competitors where accepting employment would trigger forfeiture. The list might be eight, nine or even a dozen or more companies.
That list of companies is likely your best opportunities for other employment.
There may be many reasons you want to move on
- Your career is stalled and you cannot get to the next level,
- Your department is not receiving the support it needs,
- The new boss wants to clean house or other issues make for a toxic work environment.
Equally with those reasons, it may be a matter of good fit. You find that your skills and experience are ideally suited for a direct competitor, with an opening and strong need for just what you have to offer. The problem is that competitor is named on the list – with a looming threat of draconian company clawback rights if you leave to join that competitor.
Waiver and Risk to Executive
Often, companies in the same market have mirror agreements, each with its own clawback terms. For the reasons stated, executives will want to switch and the competitor wants and needs that executive. So, swaps do occur. A company might waive the clawback, knowing that down the road or even in the short term, it might want that same professional courtesy returned back.
Yet, if you are being offered a C-level or senior executive position with a major corporation, a direct competitor of your current employer, and taking that position could risk triggering a clawback that could cost you millions of dollars, do you allow the courting to proceed on assurance to you by the suitor that your current company will waive the clawback?
My advice to clients has been – No. Too much at risk. Do not assume a waiver will be granted.
My concern is what if your current employer refuses to waive or says yes, we will waive, but we want a payment of $3 million or we want the competitor to drop its competing bid on a particular multimillion project. It is fine if your suitor pays the price asked… but what if the price for the waiver is too steep, and they withdraw the job offer they made to you.
No harm no foul. I don’t think so.
If you visit an antique shop, take off the shelf an 18th century porcelain vase, sneeze, drop and shatter the vase, the shop owner will come over to tell you, “That vase is yours now, that will be $5,000.”
By the same token, if the approach is made to your employer to waive the non-compete, and the waiver doesn’t happen and you remain on the job, you are now damaged goods, like the broken vase. Your employer may say it is not a problem, but the likelihood is that it is a problem – a big problem for YOU. Now, your employer is certain you were ready to move. In all likelihood, your employer will put into operation your departure on their schedule, not yours – alerting recruiters to find your replacement and slowly withdrawing your work, authority and reports. Soon enough the pink slip will be delivered.
Navigating past Clawbacks
Thus, my advice to navigating the clawbacks peril to join a competitor, is to fully prepare and cover yourself using this two-fold strategy:
- Plan B – The recruiting company must have a “plan B”. If they approach your company and seek a waiver, what happens if they cannot get that waiver or the price demanded is too high to pay? Plan B should have one or two and perhaps both minimum elements. One part could be “freeze you.” You sit out the one year non-compete period and the recruiter pays your salary for that year. You could take a teaching post, undertake studies, or do things that will enhance your knowledge base and connections for when you can start work with the competitor. Or you start immediately and the competitor makes you whole for all the money you would lose in the clawback.
- Signed Contract – That plan B embodies the antique store principle, “if you break it, you own it” – if the recruiting company approaches your employer, that recruiting company owns you now, your executive job offer cannot be withdrawn. That means before any approach is made, there needs to be a binding employment agreement in place, fully executed and enforceable between you and the recruiting company that sets out plan B, so you know what will be done if your current employer does not waive.
If you are a C-level or senior executive with significant clawback terms in your executive equity grants that deter you from leaving to a competitor, it does not mean you are foreclosed from better opportunities elsewhere, but to explore and make that move, you need to do it with planning and care. Engaging an executive employment attorney skilled and experienced in this field is advisable. If you are prudent, it is certainly possible to navigate the shoals and continue your career climb moving among competing companies in your field.
Written by Robert A. Adelson, Esq.
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