CAMPBELL, KESSER, AND WILLIAMS V. POTHAS CORPORATION U.S. COURT OF APPEALS FOR THE SIXTH CIRCUIT…

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CAMPBELL, KESSER, AND WILLIAMS V. POTHAS CORPORATION U.S. COURT OF APPEALS FOR THE SIXTH CIRCUIT

FACTS: PCS, a Saskatchewan fertilizer corporation, approached Arcadian, a Tennessee fertilizer corporation, about a possible merger. They decided to merge, and Arcadian and PCS negotiated the terms of the merger and the severance agreements. The Arcadian board approved employment agreements for nine senior executives that included so-called golden parachutes. The “golden parachute” portion of the severance package provided a formula to compensate senior executives in case of a change in corporate control accompanied by a material change in the executive’s position at the new company. In such a circumstance, the executive could leave the company and receive an aggregate payment in one lump sum. Three of the executives elected to take the severance package but were not compensated accordingly. Campbell (the former president and CEO), Kesser (the former vice president and general counsel), and Williams (the former vice president and CFO) sued PCS for breach of contract because PCS refused to make those severance payments to the executives. In response, PCS argued that the golden parachute agreements were not enforceable because they violated public policy. ISSUE: Are the golden parachutes offered to the three executives enforceable, or do they violate public policy? REASONING: PCS argued that the golden parachutes violated public policy and therefore that the assumption agreement promising them is void. However, PCS offered golden parachutes to its own top managers. Hypocrisy aside, PCS cited no circuit case law supporting this proposition. Although the court has frowned on golden parachutes in past dicta, the court has never held that such severance packages were per se unlawful. Furthermore, PCS did not provide much reason to equate this type of executive compensation with contracts prohibited by public policy, such as ones to perform illegal acts. Although PCS cited a congressional committee report saying that golden parachutes should be discouraged, Congress decided to tax golden parachutes and not prohibit them. Therefore, PCS did not cite compelling evidence that the contracts were prohibited by public policy. DECISION AND REMEDY: The court ruled that the golden parachutes did not violate public policy, and it subsequently ordered enforcement of the severance agreements. PCS already received the benefi t of the bargain it struck concerning golden parachutes in having an orderly change in corporate control, and it cannot refuse payment in return. SIGNIFICANCE OF THE CASE: This case illustrates the trouble fi rms can get into when they engage in mergers and severance packages. PCS made an agreement to secure the loyalty of its top management, but when the time came to fulfi ll its part of the bargain, the company tried to argue that enforcement of such a contract would be unfair and unenforceable.

CRITICAL THINKING

Is there any missing information you would ask for when considering the facts of this case? If you were to argue to reverse the trial court’s decision, what reasons would you offer?

ETHICAL DECISION MAKING

Think about the WH process of ethical decision making. What is the purpose of the court’s decision? In other words, which value is upheld? What value is in confl ict with the reasoning of the court?

 

 

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