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No compensation for retention clause due to severance agreement

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calendar 25 October 2020
globus Norway

A CEO in a real estate company signed a severance agreement. His partner then held him liable for compensation in accordance with a retention clause he signed when they established the company. However, the CEO claimed that the retention clause could not be applied. The Norwegian Court of Appeals concluded that the retention clause was valid, but the CEO could not be held liable since the compensation claim was presented after the severance agreement had been signed.

The CEO had established a real estate company together with a partner, where they each owned 37,5 % of the shares and were members of the board. The CEO and his partner were bound by a retention clause for 18 months which meant that if one party left the company, he would be liable for compensation towards the other party.

After the CEO had violated the Real Estate Act, he was given the choice between a severance agreement and being notified to the Financial Supervisory Authority of Norway by the chairman of the board. The CEO accepted the severance agreement, where he signed over all his shares to his partner. The partner then made a claim for the compensation from the retention clause, as the severance agreement came into effect prior to the 18 months had lapsed.

The CEO argued that the retention clause could not be applied, as he had neither resigned nor been dismissed. He further emphasized that he had been pressured into accepting an unfavorable severance agreement. Lastly, the CEO argued that the clause was unreasonable and had to be found invalid.

On the other hand, the partner as the counterpart argued that the cause for leaving the company was irrelevant, and that the clause stipulated a duty of payment regardless of the cause. Further, the partner argued that the clause had a legitimate cause and was clear in its wording.

Based on this, the main question for the Norwegian Court of Appeals was to decide whether the retention clause was valid, if the clause would apply to a severance agreement and if so, whether the CEO was liable for compensation.

Even though the retention clause was valid, the CEO was not liable for compensation

The court found that the retention clause was valid, as the CEO was able to negotiate prior to agreeing to the clause, and as the CEO and the partner were both professional parties. It was further emphasized that the CEO was given sufficient time to read and understand the retention clause before agreeing to the clause.

It was stated in the retention clause that it would apply if either party “resigned or was in dismissal” and that the party would become liable “regardless of the cause”. The agreement further emphasized the need for such a clause to stress the responsibility the parties had to one another. Based on this, the court found that the clause was broadened to also include end of employment due to severance agreements.

The severance agreement included a full and final settlement clause, where both the CEO and the company upon signing renounced any further claims towards each other. As the retention clause was an agreement between the CEO and the partner, the full and final settlement clause would as a main rule not apply to the retention clause.

However, the court concluded that the partner and the company had to be identified as one, as the partner with 75% of the shares and the company’s interest, had become intertwined. The decision was further based on the fact that the CEO had signed the severance agreement under the impression that this was a final settlement, and that it was a breach of loyalty for the company not to mention the retention clause during the negotiation and signing of the severance agreement. The court therefore concluded that the CEO was not liable for compensation.

IUNO's opinion

The judgement illustrates the importance of aligning expectations between two parties when entering into an agreement. It is especially interesting that the court emphasized this in the case, where both parties were professional parties. In addition, the judgement confirms that final settlements overwrite any attempts at later claims. Lastly, the judgement illustrates that shareholders can be identified with the company and bound by the company’s agreements under certain conditions.

IUNO recommends that companies prior to entering into severance agreement with its employees, ensures that all known claims and entitlements have been discussed and considered before signing. It is also important that companies ensures that the severance agreements are clearly drafted, and express regulates all relevant terms, to avoid any legal uncertainty and unnecessary legal disputes.

[The Norwegian Court of Appeals judgement LB-2019-166778 of 28 September 2020]

The CEO had established a real estate company together with a partner, where they each owned 37,5 % of the shares and were members of the board. The CEO and his partner were bound by a retention clause for 18 months which meant that if one party left the company, he would be liable for compensation towards the other party.

After the CEO had violated the Real Estate Act, he was given the choice between a severance agreement and being notified to the Financial Supervisory Authority of Norway by the chairman of the board. The CEO accepted the severance agreement, where he signed over all his shares to his partner. The partner then made a claim for the compensation from the retention clause, as the severance agreement came into effect prior to the 18 months had lapsed.

The CEO argued that the retention clause could not be applied, as he had neither resigned nor been dismissed. He further emphasized that he had been pressured into accepting an unfavorable severance agreement. Lastly, the CEO argued that the clause was unreasonable and had to be found invalid.

On the other hand, the partner as the counterpart argued that the cause for leaving the company was irrelevant, and that the clause stipulated a duty of payment regardless of the cause. Further, the partner argued that the clause had a legitimate cause and was clear in its wording.

Based on this, the main question for the Norwegian Court of Appeals was to decide whether the retention clause was valid, if the clause would apply to a severance agreement and if so, whether the CEO was liable for compensation.

Even though the retention clause was valid, the CEO was not liable for compensation

The court found that the retention clause was valid, as the CEO was able to negotiate prior to agreeing to the clause, and as the CEO and the partner were both professional parties. It was further emphasized that the CEO was given sufficient time to read and understand the retention clause before agreeing to the clause.

It was stated in the retention clause that it would apply if either party “resigned or was in dismissal” and that the party would become liable “regardless of the cause”. The agreement further emphasized the need for such a clause to stress the responsibility the parties had to one another. Based on this, the court found that the clause was broadened to also include end of employment due to severance agreements.

The severance agreement included a full and final settlement clause, where both the CEO and the company upon signing renounced any further claims towards each other. As the retention clause was an agreement between the CEO and the partner, the full and final settlement clause would as a main rule not apply to the retention clause.

However, the court concluded that the partner and the company had to be identified as one, as the partner with 75% of the shares and the company’s interest, had become intertwined. The decision was further based on the fact that the CEO had signed the severance agreement under the impression that this was a final settlement, and that it was a breach of loyalty for the company not to mention the retention clause during the negotiation and signing of the severance agreement. The court therefore concluded that the CEO was not liable for compensation.

IUNO's opinion

The judgement illustrates the importance of aligning expectations between two parties when entering into an agreement. It is especially interesting that the court emphasized this in the case, where both parties were professional parties. In addition, the judgement confirms that final settlements overwrite any attempts at later claims. Lastly, the judgement illustrates that shareholders can be identified with the company and bound by the company’s agreements under certain conditions.

IUNO recommends that companies prior to entering into severance agreement with its employees, ensures that all known claims and entitlements have been discussed and considered before signing. It is also important that companies ensures that the severance agreements are clearly drafted, and express regulates all relevant terms, to avoid any legal uncertainty and unnecessary legal disputes.

[The Norwegian Court of Appeals judgement LB-2019-166778 of 28 September 2020]

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Anders

Etgen Reitz

Partner

Sofie

Aurora Braut Bache

Associate

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