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Protecting Executive Severance Claims

By Mark G. Douglas

Amid the furor surrounding headline-grabbing scandals at corporate giants, the conduct of corporate executives is being scrutinized more closely than ever. Ushered in by the enactment of the Sarbanes-Oxley Act of 2002 (the Act), the era of “corporate accountability” has left many officers and directors worried about their potential exposure if a company struggling to remain profitable goes south during their tenure at the helm, regardless of the cause of the meltdown.

Of particular concern is management's ability to get the full benefit of a bargained-for compensation package, including bonus and severance pay. If a failing company is forced to seek bankruptcy protection, an executive's claims for unpaid compensation may be relegated to the same status as the company's other pre-petition unsecured debts, with recovery amounting to only a fraction of the amount of the claim. This can be the case even if the executive continues to work for the Chapter 11 debtor-in-possession in accordance with the terms of a pre-bankruptcy employment agreement. Still, executives may be able to protect their interests with careful planning.

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