What Are Employee Retention Agreements?

An Employee Retention Agreement is a legal contract entered into by an employer and a key employee whose services the company desires to retain. When employees know that their company might be acquired, they understand that their employment security may be in danger. In these situations, companies who want to ensure these employees' continuing loyalty and commitment sometimes feel that it is in the best interests of the company and its stockholders to provide the employee with an incentive to continue his or her employment and to motivate the employee to maximize the value of the company upon a possible change of control.

Employee Retention Agreements generally provide a bonus structure and severance model for key employees, and may include significant severance pay, acceleration of stock options, or other benefits the company deems necessary to retain the employee. Drafters of these agreements should also pay careful attention to include, if applicable, the following provisions:

1. TERM OF AGREEMENT. The agreement should likely terminate upon the earlier of: (a) the termination of Employee's employment for any reason prior to a change of control, or (b) the date that all obligations of the parties hereto with respect to this Agreement have been satisfied. This provision should be drafted accordingly.

2. AT-WILL EMPLOYMENT. If applicable, the company and the employee should both acknowledge that the Employee's employment is and shall continue to be at-will, as defined under applicable law. If the Employee's employment terminates for any reason prior to a change of control, the Employee shall not be entitled to the benefits provided by this Agreement, or any other benefit unless otherwise available in accordance with the Company's established employee plans and practices or pursuant to other agreements with the Company.

3. DEFINITION OF TERMS. It is important that the following terms referred to in this Agreement be defined:

(a) Change of Control. "Change of Control" may be drafted to mean a sale of all or substantially all of the Company's assets, or a merger, consolidation or other capital reorganization of the Company with or into another corporation. Some limitations on that definition may also be applicable.

(b) Cause. "Cause" for Employee's termination should be defined to mean the good faith judgment of the Company's Board of Directors, that the undersigned has engaged in or committed any of the following: (i) gross negligence or willful misconduct in the performance of his duties to the Company, (ii) repeated unexplained or unjustified absence from the Company, (iii) a material and willful violation of federal or state law, (iv) commission of any act of fraud with respect to the Company, (v) breach of any confidentiality obligation to the Company, whether determined by agreement or by applicable law; or (vi) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company.

(c) Constructive Termination. "Constructive Termination" should be defined as occurring if here is (1) (a) a material adverse change in Employee's position causing such position to be of materially reduced responsibility, (b) any reduction of Employee's base compensation, or (c) Employee's refusal to relocate to a facility or location more than 50 miles from the Company's current location and (2) within the 30-day period immediately following any of the foregoing events, Employee elects to terminate his or her employment voluntarily.

4. SEPARATION BENEFITS UPON INVOLUNTARY TERMINATION FOLLOWING CHANGE OF CONTROL. The employee may want to include a provision that states that within one year of the effective date of a change of control, the employee's employment with the Company is terminated (an "Involuntary Termination") by the Company or the successor corporation without cause or, by the Employee as the result of a constructive termination by the Company or the successor corporation, then, the vesting of Employee's then unvested shares of the Company's common stock shall automatically be accelerated so as to become vested as of the effective date of the involuntary termination or constructive termination.

These are a few of the most important provisions that must be included in an effective Employee Retention Agreement. Provisions covering the enforceability of the agreement on successors of the employer and employee, waiver, choice of law, and severability should also be included.