PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Renata Vasquez, Partner
FROM: James Underwood, Associate
DATE: June 6, 2024
RE: New York Law Governing Executive Employment Agreements — Key Provisions and Pitfalls
MATTER: Northgate Telecommunications PLC — CEO Employment Negotiation
MATTER NO.: 1022-00004
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I. Introduction and Purpose
This memorandum surveys New York law governing executive employment agreements in connection with the firm's engagement to negotiate and draft an executive employment agreement for Marcus Elliot Harding as incoming Chief Executive Officer of Northgate Telecommunications PLC ("NTP" or the "Company"). The engagement was opened on June 4, 2024, following the retention of Calderwood & Harkness LLP by NTP, through Elaine Whitford, Senior Vice President and Group General Counsel.
The proposed employment agreement will be governed by New York law, with the primary employment relationship established between Northgate Telecommunications US, Inc. ("NTP US"), a wholly-owned Delaware subsidiary of NTP, and Mr. Harding, who currently resides at 14 Gramercy Park South, New York, New York. Mr. Harding will be based at NTP's US Operations Headquarters located at 600 Lexington Avenue, 38th Floor, New York, New York 10022. The US employment agreement will govern approximately eighty percent (80%) of Mr. Harding's duties and compensation.
A secondary UK service agreement will be executed between Northgate Telecommunications PLC (a public limited company incorporated in England and Wales, registered number 07381264) and Mr. Harding. That agreement will be governed by the laws of England and Wales and is being addressed separately by Moorfield Bates LLP, with Simon Aldridge serving as lead partner and Hannah Carmichael as the responsible associate on the matter. This memorandum does not purport to analyze English law issues, except to the extent that the dual-contract structure raises questions implicating New York law or requires coordination between the two agreements.
The purpose of this memorandum is to identify the key legal provisions, doctrines, and drafting pitfalls under New York law that will inform the drafting and negotiation of Mr. Harding's employment agreement. The memorandum is organized around the principal subject-matter areas typically addressed in public company CEO employment agreements, including the at-will employment presumption, fixed-term enforceability, cause and good reason definitions, change in control provisions, Section 409A of the Internal Revenue Code, ERISA, compensation and equity provisions, restrictive covenants, indemnification, dispute resolution, and cross-border coordination issues.
For reference, the proposed employment term is five (5) years, commencing October 1, 2024 and expiring September 30, 2029, with automatic one-year renewals unless either party provides 180 days' advance written notice of non-renewal. Mr. Harding's proposed total target annual compensation is $13,812,500, comprised of a base salary of $1,750,000, a target annual incentive bonus of $3,062,500, and long-term incentive equity awards valued at $9,000,000 per year. In addition, Mr. Harding would receive a sign-on cash bonus of $5,000,000, a sign-on RSU grant valued at $12,000,000, and a sign-on PSU grant valued at $6,400,000. The total make-whole and sign-on package, including both cash and equity, is designed to compensate Mr. Harding for the forfeiture of $23,400,000 in unvested equity at his current employer, Marlowe Asset Management Digital Holdings, Inc.
This memorandum is intended as a foundational survey. Separate, more detailed memoranda will address specific issues identified herein, as noted in the conclusion.
II. The At-Will Employment Presumption Under New York Law
A. General Rule
New York follows the strong common law presumption that all employment relationships are "at-will." Under this well-established doctrine, absent an express agreement to the contrary, an employment relationship is terminable by either party at any time, for any reason or no reason, with or without cause and with or without notice. The New York Court of Appeals has affirmed this presumption repeatedly over more than a century of jurisprudence. In Martin v. New York Life Insurance Co., 148 N.Y. 117 (1895), the Court of Appeals established that an indefinite hiring is presumed to be at-will, and that this presumption is deeply embedded in New York law. The Court reaffirmed and strengthened this principle in Murphy v. American Home Products Corp., 58 N.Y.2d 293 (1983), holding that New York does not recognize a common law cause of action for wrongful discharge of an at-will employee, and declining the invitation to adopt a tort of wrongful discharge in violation of public policy. See also Sabetay v. Sterling Drug, Inc., 69 N.Y.2d 329 (1987) (reaffirming the at-will presumption and rejecting an implied covenant of good faith and fair dealing as a limitation on the employer's right to terminate an at-will employee).
The at-will presumption applies to all employees, including senior executives. New York courts have consistently held that the absence of a written employment agreement with a definite term renders the employment relationship at-will, regardless of the employee's seniority, the length of service, or the magnitude of compensation. See Rooney v. Tyson, 91 N.Y.2d 428 (1998) (addressing enforceability of oral employment agreements with highly compensated individuals); Wieder v. Skala, 80 N.Y.2d 628 (1992) (noting the strength of the at-will presumption even for professionals in a specialized context). The presumption is not merely a default rule that courts will casually set aside; rather, it represents a robust policy of New York law that requires clear and unambiguous evidence to overcome.
B. Overcoming the At-Will Presumption
The at-will presumption may be overcome by an express, written agreement specifying a definite term of employment and/or expressly limiting the employer's right to terminate the executive during that term. Courts require clear evidence that the parties intended to create a fixed-term relationship with specific termination protections. As the Court of Appeals observed in Rooney, the party seeking to establish a fixed-term employment relationship bears the burden of demonstrating that the parties agreed to such an arrangement.
Oral agreements purporting to establish a fixed term of employment are subject to New York's Statute of Frauds. Section 5-701(a)(1) of the New York General Obligations Law provides that an agreement that, by its terms, cannot be performed within one year from the date of its making is void unless it is evidenced by a writing sufficient to indicate that a contract has been made between the parties and is signed by the party to be charged. This provision is directly applicable to the proposed Harding employment agreement, which contemplates an initial term of five years. An oral agreement for a five-year employment term would be unenforceable under the Statute of Frauds. Accordingly, the proposed employment agreement for Mr. Harding must be executed as a signed written instrument in order to be enforceable and to overcome the at-will presumption.
Courts have also recognized that implied employment contracts may arise based on employee handbooks, written policies, or a course of conduct. See Weiner v. Sterling Reach Industries, Inc., 57 N.Y.2d 458 (1982) (holding that an employee handbook provision requiring termination only for "just and sufficient cause," coupled with the employer's conduct, could create an implied contractual obligation). However, this doctrine is significantly more limited for senior executives who negotiate individualized employment agreements. Where the parties have entered into a comprehensive written employment agreement, courts are unlikely to find that supplemental implied-contract obligations arise from handbooks or policies of general applicability. Moreover, a properly drafted integration clause will further insulate the written agreement from claims that extrinsic policies or conduct created additional binding obligations.
C. Relevance to This Engagement
The proposed fixed-term employment agreement for Mr. Harding, with a five-year initial term, expressly overrides the at-will presumption. By agreeing to a definite term and specifying the limited circumstances under which either party may terminate the relationship before the expiration of that term, the parties create a binding contractual framework that displaces the default at-will rule.
Several drafting considerations flow from this analysis. First, the agreement should include a clear integration clause and a disclaimer of any oral or implied agreements to avoid any ambiguity regarding the scope of the parties' understanding and to prevent claims that representations made during the negotiation process (including by Mr. Harding's representative, Hargrove & Liddell, or by Ms. Whitford on behalf of NTP) created enforceable supplemental obligations. Second, the automatic renewal provision—which provides for successive one-year renewals unless either party delivers 180 days' advance written notice of non-renewal—must be carefully drafted to specify the nature of the renewed term. Specifically, the agreement should state whether the renewal term is also a fixed term (with the same termination protections) or whether, upon the expiration of the initial five-year term, the relationship converts to an at-will arrangement unless the parties affirmatively negotiate a new fixed-term agreement. This distinction has significant practical consequences: if the renewed term is a fixed term, the termination-for-cause and good-reason provisions continue in full force; if the relationship reverts to at-will, the executive's severance protections may be substantially diminished.
III. Fixed-Term Employment Agreements: Enforceability and Construction
A. Enforceability of Fixed Terms
New York courts enforce fixed-term employment agreements so long as they satisfy the requirements of the Statute of Frauds and are supported by adequate consideration. As discussed in Section II, the Statute of Frauds requirement is satisfied by a signed written instrument. The consideration requirement is satisfied by the mutual exchange of promises: the employer's promise to employ the executive for the fixed term and to pay the specified compensation, and the executive's promise to serve in the specified capacity and to comply with the restrictive covenant and other obligations set forth in the agreement.
In the case of the proposed Harding agreement, consideration is particularly robust. Mr. Harding will be leaving his current position as President and Chief Operating Officer of Marlowe Asset Management Digital Holdings, Inc., where he earns total target compensation of $11,125,000 per year and holds $23,400,000 in unvested equity that will be forfeited upon his departure. His agreement to forgo his current employment, to forfeit the unvested Marlowe Asset Management equity, and to decline other opportunities in order to assume the NTP CEO position constitutes ample consideration for the fixed-term arrangement. Courts have recognized that an executive's agreement to leave a lucrative position and forgo alternative employment opportunities provides substantial consideration for a fixed-term employment agreement. See Borne Chemical Co. v. Dictrow, 85 A.D.2d 646 (2d Dep't 1981) (recognizing that an executive's departure from existing employment constitutes valid consideration).
Courts construe fixed-term employment agreements strictly. The employer's right to terminate the executive before the expiration of the stated term exists only to the extent expressly provided in the agreement. Where the agreement specifies that the employer may terminate the executive only for "cause" (as defined in the agreement), the employer cannot terminate for other reasons not enumerated in the cause definition. See Wieder, 80 N.Y.2d at 634 (noting the importance of the express terms of the employment agreement in defining the scope of the employer's termination rights). If the employer terminates the executive for a reason not constituting "cause" under the agreement, the termination is treated as a termination without cause, triggering whatever consequences (including severance payments) the agreement specifies for that contingency.
B. Early Termination Provisions
A well-drafted fixed-term employment agreement must address the consequences of early termination under multiple scenarios, including termination by the employer for cause, termination by the employer without cause, resignation by the executive without good reason, resignation by the executive for good reason, termination upon death, and termination upon disability. The failure to address any of these scenarios creates ambiguity that may give rise to litigation.
Termination Without Cause. If the agreement permits the employer to terminate the executive without cause during the fixed term (as is standard in CEO employment agreements), the agreement must specify the financial and other consequences of such termination. The proposed structure for the Harding agreement contemplates the following severance upon termination without cause (or resignation for good reason) outside of the change in control context: a cash severance payment equal to 2x the sum of base salary and target annual incentive bonus, yielding a severance quantum of $9,625,000 (calculated as 2 × ($1,750,000 + $3,062,500)). In the change in control context, severance would increase to 2.5x, yielding $12,031,250 (calculated as 2.5 × ($1,750,000 + $3,062,500)) under NTP's proposal. In addition to cash severance, the proposed severance package includes benefits continuation, outplacement assistance, and specified equity treatment (acceleration of unvested awards), the details of which are addressed in Sections VI and IX below.
If the agreement is silent on the employer's right to terminate without cause during the fixed term, or if it does not specify the consequences of such termination, New York law provides that the employer may be liable for the executive's full compensation for the remainder of the unexpired term. See Wakefield v. Northern Telecom, Inc., 769 F.2d 109 (2d Cir. 1985) (applying New York law and holding that, where an employment agreement for a definite term was silent on the right to terminate without cause, the employer was liable for the executive's compensation through the end of the term). This represents a significant exposure: if NTP were to terminate Mr. Harding without cause on the first day of the employment term without a clearly drafted severance provision, the exposure could approach $69,062,500 (the aggregate target compensation over five years), less any mitigation through subsequent employment. A properly drafted without-cause termination provision eliminates this ambiguity by specifying the precise severance payments that discharge the employer's obligations upon early termination.
Termination for Cause. The drafting of the for-cause termination provision requires particular care. A failure to include an express termination-for-cause provision with adequate specificity can result in protracted and costly litigation over whether the termination was proper. Courts will scrutinize whether the employer's stated basis for the for-cause termination falls within the contractual definition of "cause" and whether the employer followed any procedural requirements (such as notice, cure, and Board determination procedures) specified in the agreement. The "cause" definition is addressed in detail in Section IV below.
C. Automatic Renewal / Evergreen Clauses
New York courts generally enforce automatic renewal provisions in employment agreements. Such provisions are treated as integral parts of the contract and are construed according to their plain terms. See Rosenfeld v. Abraham Joshua Heschel Day School, Inc., 226 A.D.2d 1 (1st Dep't 1996) (enforcing an automatic renewal provision in an employment agreement). The proposed 180-day notice period for non-renewal should be clearly stated in the agreement and should specify:
(a) the party required to give notice (either party should have the right);
(b) the method of notice delivery (consistent with the general notice provision of the agreement—e.g., written notice delivered by hand, by nationally recognized overnight courier, or by certified mail, return receipt requested);
(c) the date on which the notice period commences and the effective date of termination upon non-renewal (i.e., the expiration of the then-current term); and
(d) the consequences of the employer's failure to provide timely notice of non-renewal (i.e., automatic renewal for an additional one-year term).
A critical drafting issue is whether the severance provisions applicable to a termination without cause also apply upon non-renewal of the agreement. The distinction matters: if the employer simply allows the agreement to expire at the end of a term by providing timely non-renewal notice, the executive may argue that the non-renewal effectively constitutes a termination without cause, entitling the executive to severance. NTP and Mr. Harding should negotiate whether non-renewal triggers severance (and, if so, at what level), or whether non-renewal at the end of a term is treated as a natural expiration of the contract with no severance obligation. Market practice varies, and this issue should be addressed explicitly in the agreement to avoid post-termination disputes.
IV. Definition and Enforceability of "Cause" Termination
A. Importance of the "Cause" Definition
The definition of "cause" is one of the most heavily negotiated provisions in any executive employment agreement, and rightfully so: it is the fulcrum on which the executive's severance protections turn. If the employer terminates the executive for "cause" as defined in the agreement, the executive typically forfeits all severance payments, continued benefits, and equity acceleration that would otherwise be payable upon a termination without cause. By contrast, if the employer purports to terminate for cause but fails to establish that the termination falls within the contractual definition, the termination is re-characterized as a without-cause termination, triggering the full severance package. Given the proposed severance quantum of $9,625,000 (non-CIC) or $12,031,250 (CIC), plus the value of accelerated equity, the "cause" definition represents tens of millions of dollars of economic exposure for both parties.
New York courts will enforce the parties' agreed definition of "cause" so long as it is not unconscionable or contrary to public policy. See Gould v. Board of Education, 81 N.Y.2d 446 (1993); Ruffolo v. Garbarini & Scher, P.C., 239 A.D.2d 8 (1st Dep't 1998). Because New York courts apply freedom-of-contract principles to executive employment agreements negotiated at arm's length between sophisticated parties, the definition of "cause" set forth in the agreement will generally control, and courts will not look beyond the four corners of the contract to identify additional grounds for a for-cause termination.
B. Typical Components of "Cause"
Market-standard definitions of "cause" in public company CEO employment agreements typically include some or all of the following categories:
1. Willful misconduct or gross negligence in the performance of the executive's duties to the company, as distinguished from ordinary negligence or good-faith errors of business judgment.
2. Material breach of the employment agreement by the executive, which may or may not be subject to a notice-and-cure period depending on the nature of the breach. The materiality threshold is significant, as it insulates the executive from termination based on minor or technical breaches.
3. Criminal conviction — specifically, the conviction of, or plea of guilty or nolo contendere to, (a) a felony, or (b) a crime involving fraud, dishonesty, or moral turpitude. The scope of this provision is frequently negotiated: executives often seek to limit it to felonies materially related to the executive's employment or the company's business, while employers prefer broader language capturing any felony conviction.
4. Fraud, embezzlement, or misappropriation of company assets or property. This category is distinct from the criminal conviction category because it does not require a criminal conviction; the employer need only establish the underlying conduct.
5. Violation of material company policies, including codes of conduct, ethics policies, anti-harassment policies, and insider trading policies. Executives may resist this category as overly broad, particularly where the company retains the unilateral right to amend its policies, and may seek to limit it to policies that have been provided to the executive in writing.
6. Willful failure to follow lawful directives of the Board of Directors. This category addresses insubordination and is typically subject to a materiality qualifier (i.e., "material and willful failure") and a notice-and-cure mechanism.
C. New York Law Interpretive Principles
Several principles of New York contract interpretation govern the construction and application of "cause" provisions in employment agreements:
Strict construction against the employer. New York courts construe "cause" provisions strictly against the party seeking to invoke them—typically the employer, which seeks to avoid payment of severance. This principle of strict construction means that ambiguities in the cause definition will be resolved in favor of the executive. See Ruffolo, 239 A.D.2d at 11 ("The provisions of the employment agreement which govern termination 'for cause' should be strictly construed against the employer."). This interpretive principle underscores the importance of drafting a detailed and specific cause definition: vague or broadly worded provisions invite disputes that, under the rule of strict construction, the employer is likely to lose.
Enumeration principle. Where the employment agreement defines "cause" through an enumerated list of specific events or conduct, the employer may terminate for cause only on the basis of the enumerated grounds. Extrinsic evidence of misconduct that does not fall within one of the enumerated categories generally cannot support a for-cause termination. See Russ Berrie & Co., Inc. v. Gantt, 205 A.D.2d 730 (2d Dep't 1994). Drafters should be aware that a broadly worded "catch-all" clause (e.g., "any other conduct materially detrimental to the company") may be construed narrowly under the ejusdem generis canon—that is, the catch-all will be limited to conduct of the same kind and character as the specifically enumerated grounds.
Notice-and-cure requirements. Courts will enforce notice-and-cure provisions with exactitude. If the employment agreement requires the employer to provide the executive with written notice of the conduct allegedly constituting cause and to afford the executive a specified period to cure the condition, the employer's failure to comply with these procedural requirements can convert a for-cause termination into a without-cause termination, triggering the full severance package. See Wieder, 80 N.Y.2d at 635; Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., 30 N.Y.2d 34 (1972) (strict enforcement of contractual prerequisites to termination). This result obtains even if the underlying conduct would otherwise have constituted cause if the proper procedures had been followed.
Process protections. Some executive employment agreements require that a for-cause termination be preceded by a Board determination—for example, a vote of a majority of the independent directors (excluding any director who is a party to the dispute or who has a personal interest in the outcome) finding that the executive's conduct constitutes cause as defined in the agreement. Courts enforce these procedural requirements as conditions precedent to a valid for-cause termination. Failure to satisfy the required Board process renders the termination defective and, absent cure, converts it to a without-cause termination.
D. Drafting Recommendations for the NTP–Harding Agreement
Based on the foregoing analysis, I recommend the following approach to the "cause" definition in the Harding employment agreement:
1. Include a detailed, enumerated definition of "cause" that specifies each category of conduct constituting cause with as much specificity as possible. Avoid vague, open-ended language (e.g., "conduct prejudicial to the company's interests") that may be susceptible to strict-construction challenges.
2. Include a 30-day notice-and-cure period for curable breaches. For categories of cause that are susceptible to cure (e.g., material breach of the agreement, failure to follow Board directives, violation of company policies), the agreement should require the employer to provide Mr. Harding with written notice specifying in reasonable detail the nature of the alleged cause and to afford him a period of not less than 30 calendar days to cure the condition to the Board's reasonable satisfaction.
3. Specify the Board process for making a cause determination. The agreement should require that a determination of cause be made by a vote of a majority of the independent members of the Board of Directors, excluding Mr. Harding and any director who is not "independent" under applicable NYSE listing standards. The Board should be required to provide Mr. Harding with written notice of the proposed cause determination and an opportunity to be heard before the Board (with counsel) before the determination becomes final.
4. Carve out from curability. Certain categories of cause should not be subject to the notice-and-cure mechanism. Specifically, cause based on a criminal conviction, a plea of guilty or nolo contendere, fraud, embezzlement, or misappropriation of company assets should be effective immediately upon the Board's determination, without any cure period, as such conduct by its nature is not susceptible to cure.
5. Define key terms. The agreement should define critical terms within the cause provision, including "willful" (requiring an intentional act or omission undertaken in bad faith or without a reasonable belief that the act or omission was in the best interests of the company) and "material" (to establish a threshold of significance that excludes trivial or immaterial breaches).
V. Resignation for "Good Reason" / Constructive Termination
A. The Doctrine
"Good reason" provisions are a standard and essential feature of senior executive employment agreements. They function as the executive's counterpart to the employer's right to terminate for cause, allowing the executive to resign and receive the same severance benefits that would be payable upon a termination without cause if the employer materially breaches the employment agreement or materially diminishes the executive's role, authority, or compensation. The practical effect is to protect the executive against what might be termed "constructive termination"—situations in which the employer does not formally terminate the executive but takes actions so detrimental to the executive's position that the executive is effectively forced to resign.
Under New York law, courts will enforce contractually defined "good reason" triggers as written. If the employment agreement defines "good reason" and specifies the consequences of a good reason resignation (i.e., the executive receives the same severance as upon a without-cause termination), the courts will give effect to the parties' agreement. Importantly, absent an express contractual "good reason" provision, the executive's voluntary resignation does not entitle the executive to severance or other termination benefits under the employment agreement. New York law does not imply a general right to resign for "good reason" where the contract is silent on the subject.
B. Typical "Good Reason" Triggers
The following categories of employer conduct are commonly identified as "good reason" triggers in public company CEO employment agreements:
1. Material reduction in base salary. A reduction in the executive's base salary below a specified threshold—typically a reduction of 10% or more from the then-current base salary (or the initial base salary, if higher). For Mr. Harding, this would be a reduction below $1,575,000 (assuming a 10% threshold applied to the initial base salary of $1,750,000). Some agreements provide that a proportional reduction in base salary applicable to all senior executives does not constitute good reason, but this exception is less common in CEO agreements.
2. Material diminution in title, duties, authority, or reporting relationship. This trigger is of particular importance for a CEO. Mr. Harding, as Chief Executive Officer, will hold the most senior management position in the company and will report directly to the Board of Directors. Any change in his title (e.g., appointment of a Co-CEO or redesignation as President), any material reduction in his duties or authority (e.g., stripping him of oversight over major business units), or any change in his reporting relationship (e.g., interposing an Executive Chairman with operational authority between Mr. Harding and the Board) could constitute good reason.
3. Relocation of principal office. The relocation of the executive's principal place of employment beyond a specified radius—typically 25 to 50 miles—from the current principal office. For Mr. Harding, the current principal office is NTP's US Operations Headquarters at 600 Lexington Avenue, New York, New York 10022. A relocation threshold of 50 miles from that address would encompass most of the New York metropolitan area but would not reach locations in other major markets.
4. Material breach by the employer of any compensation or benefit obligation. This trigger encompasses failures to pay base salary, annual incentive bonus (to the extent earned), or equity awards when due, as well as failures to provide agreed-upon benefits.
5. Failure to nominate the executive for election to the Board. This trigger is particularly relevant for a CEO, who customarily serves as a member of the company's Board of Directors. Mr. Harding's agreement should provide that the Company's failure to nominate him for election (or re-election) to the Board constitutes good reason, subject to applicable corporate governance requirements and any regulatory constraints.
C. Notice-and-Cure Mechanics
Standard market practice requires that the executive follow a prescribed notice-and-cure process before a resignation qualifies as a "good reason" resignation. The purpose of this process is to provide the employer with notice of the condition alleged to constitute good reason and an opportunity to cure the condition before the executive is entitled to resign with severance. The typical mechanics are as follows:
Notice. The executive must provide the employer with written notice within a specified period after the initial occurrence of the condition constituting good reason. The notice period is typically 60 to 90 days. A shorter notice period favors the executive (less time for the condition to be deemed waived by acquiescence); a longer period favors the employer (more opportunity to argue that the executive's failure to give timely notice constitutes a waiver or acquiescence in the condition).
Cure period. Upon receipt of the executive's notice, the employer has a specified period—typically 30 days—to cure the condition to the executive's reasonable satisfaction. If the employer cures the condition within the cure period, the executive's right to resign for good reason based on that particular occurrence is extinguished.
Resignation window. If the employer fails to cure the condition within the cure period, the executive must actually resign within a specified window—typically 30 days after the expiration of the cure period—in order for the resignation to qualify as a "good reason" resignation. If the executive does not resign within this window, the good reason claim based on that occurrence lapses, and the executive is deemed to have waived the right to resign for good reason based on that event (though a subsequent occurrence of the same or different condition could give rise to a new good reason claim).
Failure to comply with any element of the notice-and-cure timeline extinguishes the executive's good reason claim. This is a strictly enforced requirement under New York law, and the agreement should be drafted with sufficient precision to avoid disputes over whether the executive satisfied each procedural step.
D. New York Law Treatment
New York courts will enforce the parties' contractual good reason definition as written. Courts will not imply a good reason right where the agreement does not provide one, and they will not expand the scope of the contractual good reason triggers beyond their express terms. See Vernitron Corp. v. Benjamin, 125 A.D.2d 508 (2d Dep't 1986); Ashker v. International Business Machines Corp., 168 A.D.2d 724 (3d Dep't 1990).
The common law doctrine of "constructive termination" or "constructive discharge" under New York law is significantly more limited than the contractual good reason concept. Under New York common law, a constructive termination requires employer conduct that is so deliberate and egregious as to leave the employee no reasonable alternative but to resign. See Pena v. Brattleboro Retreat, 702 F.2d 375 (2d Cir. 1983) (applying New York law). This is a high standard, and it is rarely met in the context of compensation or role diminution—the very circumstances that contractual good reason provisions are designed to address. Accordingly, the inclusion of an explicit, detailed good reason provision with precise triggers, notice, cure, and timing requirements is far preferable to reliance on the common law constructive termination doctrine.
E. Special Considerations for the NTP–Harding Agreement
Several aspects of the proposed Harding engagement require special attention in drafting the good reason provision:
Dual-contract structure. Mr. Harding's employment will be governed by two agreements: the US employment agreement (governing 80% of his duties) and the UK service agreement (governing 20% of his duties). A material change to the allocation of duties between the US and the UK—for example, reducing Mr. Harding's US duties to 50% and increasing UK duties to 50%, or transferring operational authority over major business units from the US to the UK—could constitute a material diminution in his US-based role. The good reason provision in the US employment agreement should address this scenario explicitly, either by including a trigger based on a material change in the allocation of duties between jurisdictions or by defining the executive's duties with sufficient specificity that a material reallocation would constitute a breach.
Board composition changes. Mr. Harding, through his representatives at Hargrove & Liddell, has demanded the inclusion of a "Board turnover trigger" in the change in control definition (discussed in Section VI below). A separate but related question is whether a change in the composition of the Board of Directors that materially affects Mr. Harding's reporting relationship or the Board's posture toward management should constitute a good reason trigger. These are distinct concepts and should be treated separately in the agreement. A change in Board composition may affect the executive's working relationship with the Board without constituting a change in control, and the good reason provision should address this possibility with appropriate nuance. For example, the removal of the CEO from the Board (or failure to renominate) is a clear good reason trigger, while a change in the identities of individual directors is generally not, unless the change results in a material alteration of the executive's reporting structure.
Interaction with change in control provisions. The proposed Harding agreement contemplates a "double trigger" CIC severance structure, meaning that CIC severance is payable only upon a qualifying termination (without cause or for good reason) within a specified period following a change in control. This structure means that a good reason resignation following a change in control triggers the enhanced CIC severance (2.5x under NTP's proposal, compared to 2x for a non-CIC termination). The definition of "good reason" in the CIC context may be broader than in the non-CIC context—for example, it may include triggers such as the failure to make the executive the CEO of the surviving entity or the successor's failure to assume the employment agreement. The agreement should clearly delineate the CIC good reason triggers from the non-CIC good reason triggers, or specify that the same triggers apply in both contexts.
VI. Change in Control Provisions
A. Overview. Change in control provisions are a central and indispensable feature of public company CEO employment agreements. Their purpose is to provide the executive with enhanced severance protections and equity acceleration in the event that the company undergoes a fundamental corporate transaction—such as a merger, acquisition, or sale of substantially all assets—that results in a change in the identity of the company's controlling shareholders or governing body. These provisions serve a dual purpose: they protect the executive against the heightened risk of termination that accompanies a change in control (new owners or management frequently seek to install their own leadership team), and they align the executive's interests with those of the shareholders by reducing the executive's incentive to oppose a transaction that may be in the shareholders' best interests.
The proposed Harding employment agreement includes a dedicated section (proposed Section 7) addressing change in control protections. The parties have agreed in principle on the structural framework—a double-trigger approach—but significant gaps remain on the CIC severance quantum, the scope of the CIC definition, and the treatment of Section 280G excise taxes.
B. Definition of "Change in Control"
The contractual definition of "change in control" determines which corporate events trigger the enhanced protections. The parties are negotiating the following elements:
(a) Acquisition of voting securities. The acquisition by any person or group of more than 50% of the outstanding voting securities of NTP or NTP US. This is a standard trigger and is not in dispute.
(b) Merger or consolidation. The consummation of a merger, consolidation, or similar business combination transaction involving NTP or NTP US, following which the shareholders of NTP immediately prior to the transaction hold less than 50% of the voting securities of the surviving or resulting entity. This trigger is also standard and is not in dispute.
(c) Asset sale. The sale, transfer, or other disposition of all or substantially all of the assets of NTP or NTP US. This trigger is standard and is not in dispute.
(d) Board turnover trigger. The replacement of a majority of the members of the Board of Directors within any 12-month period, unless the election or nomination of each new director was approved by a majority of the directors then still in office who were directors at the beginning of the period (i.e., "continuing directors"). This trigger—sometimes referred to as an "incumbent board" provision—is demanded by Mr. Harding through Hargrove & Liddell. NTP has rejected this trigger as overreach, arguing that it is inconsistent with UK corporate governance norms (which emphasize regular Board refreshment and discourage entrenchment) and could be triggered by routine Board succession planning. From a New York law perspective, there is no prohibition on including a Board turnover trigger in the CIC definition; courts will enforce the parties' agreed definition without implying additional triggers or constraining the triggers the parties choose to include. The dispute is ultimately a negotiation issue rather than a legal one, though we should advise NTP that the Board turnover trigger is included in the majority of S&P 500 CEO employment agreements and is considered a market-standard element by most proxy advisory firms.
C. Single Trigger vs. Double Trigger
The parties have agreed in principle to a double-trigger CIC severance structure, meaning that the enhanced CIC severance and equity acceleration are payable only if, within a specified "protection period" following a change in control, the executive is either (a) terminated by the employer without cause or (b) resigns for good reason (as defined in the agreement). Under a double-trigger structure, the mere occurrence of a change in control, without a qualifying termination, does not by itself trigger severance or equity acceleration.
This approach is strongly preferred by institutional shareholders, proxy advisory firms, and corporate governance advocates. ISS (Thackeray Health IT), Tarrant Partners LLC, and the firm's consultant, Veltrano Proxy Advisors (Sandra Kolb), have all indicated that single-trigger CIC provisions—under which severance or equity vesting occurs solely upon a change in control, regardless of whether the executive is terminated—are disfavored and may result in adverse vote recommendations on say-on-pay proposals or equity plan approvals.
The "protection period"—the window following a change in control during which a qualifying termination triggers enhanced CIC severance—is typically 12 to 24 months. Mr. Harding has proposed a 24-month protection period, which is standard for public company CEOs. The protection period should be clearly defined in the agreement, with the start date being the closing date of the CIC transaction and the end date being the second anniversary of the closing date.
An additional drafting consideration is the treatment of terminations that occur in anticipation of a change in control—sometimes referred to as "pre-CIC terminations." Some agreements provide that a termination without cause or resignation for good reason that occurs within a specified period (e.g., 6 months) prior to the closing of a change in control is treated as a CIC termination if the CIC subsequently closes. This provision protects the executive against the scenario in which the acquiror arranges for the executive's termination before the CIC closes in order to avoid triggering CIC severance. The parties should negotiate whether to include such a provision.
D. CIC Severance Quantum
The CIC severance quantum represents one of the primary negotiation impasses between NTP and Mr. Harding. The parties' respective positions are as follows:
The gap in cash severance between the parties' positions is $2,406,250 ($14,437,500 minus $12,031,250). The more significant financial exposure lies in the Section 280G treatment: Mr. Harding's demand for a full tax gross-up could expose NTP to an estimated $4.2 million to $6.8 million in additional cost, depending on the parachute payment calculation and the applicable tax rates. The combined gap—including the incremental cash severance, the gross-up exposure, and the difference in benefit continuation cost—represents a total negotiation gap of approximately $7.5 million to $10 million. This topic is addressed in greater detail in the separate Section 280G parachute payment analysis memorandum, which I will circulate on June 7, 2024.
E. New York Law Considerations
New York courts enforce CIC provisions as written, applying standard principles of contract interpretation. There are no special New York statutory limitations on the quantum of CIC severance for private-sector employees. Unlike certain states that have adopted legislation limiting or regulating golden parachute payments (outside the tax context), New York imposes no cap on CIC severance payable to private-sector executives.
However, NTP's status as a publicly listed company—its American Depositary Receipts trade on the New York Stock Exchange under the ticker symbol "NTPC," and its ordinary shares are listed on the London Stock Exchange (LON: NTP)—subjects the company to a web of regulatory and governance constraints that effectively limit the practical range of CIC severance terms. These include SEC disclosure requirements (proxy statement disclosure of CIC payments under Item 402 of Regulation S-K), NYSE listing standards (including shareholder approval requirements for equity plans), ISS and Tarrant Partners LLC proxy advisory scrutiny (which may result in adverse vote recommendations if CIC provisions are perceived as excessive), and the UK Corporate Governance Code (which discourages "excessive" termination payments and recommends that notice or contract periods not exceed one year). While these regulatory and governance considerations do not create legally binding caps under New York law, they impose meaningful practical constraints on the CIC terms that NTP's Board and compensation committee can approve and defend to shareholders.
VII. Interaction with Section 409A of the Internal Revenue Code
A. Overview of Section 409A
Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), governs the taxation of nonqualified deferred compensation. Enacted as part of the American Jobs Creation Act of 2004, Section 409A imposes strict requirements on the timing of deferral elections and the timing of payments of deferred compensation. A payment arrangement that fails to comply with Section 409A—either in its documentary terms or in its operational administration—can result in severe adverse tax consequences for the executive: the deferred compensation becomes immediately includible in the executive's gross income in the year of the violation, a 20% additional tax is imposed on the amount included in income, and an interest penalty (calculated at the underpayment rate plus one percentage point, accruing from the year the compensation was first deferred or, if later, the year in which it first became no longer subject to a substantial risk of forfeiture) is also imposed. These penalties are borne by the executive, not the employer, although the employer has withholding and reporting obligations.
Because of the severity of the penalties and the breadth of Section 409A's reach, virtually every CEO employment agreement must be drafted with Section 409A compliance as a foundational consideration. The penalty regime creates significant personal financial risk for Mr. Harding if the agreement is not properly structured.
B. Key 409A Issues for the NTP–Harding Agreement
Separation from Service. Severance payments that are contingent on the executive's termination of employment must be triggered by a "separation from service" as defined under Section 409A and the Treasury regulations thereunder. See Treas. Reg. § 1.409A-1(h). A "separation from service" occurs when the executive and the employer reasonably anticipate that no further services will be performed or that the level of bona fide services the executive will perform will permanently decrease to no more than 20% of the average level of bona fide services performed over the immediately preceding 36-month period. This definition is critical in the Harding context because of the dual-contract structure.
Mr. Harding's employment will be divided between two contracts: the US employment agreement with NTP US (approximately 80% of duties) and the UK service agreement with NTP PLC (approximately 20% of duties). Under Section 409A, a termination of the US employment agreement while the UK service agreement remains in effect may not constitute a "separation from service" if Mr. Harding continues to perform services for NTP PLC at a level exceeding 20% of his prior service level. The analysis requires aggregation of all related employers under the Section 409A "service recipient" rules. NTP US and NTP PLC are members of a controlled group and would be treated as a single service recipient for Section 409A purposes. Treas. Reg. § 1.409A-1(h)(3). Accordingly, a termination of the US agreement alone, while Mr. Harding continues to provide services under the UK agreement at a level exceeding 20% of his prior service level, would not constitute a separation from service, and severance payments that are subject to Section 409A could not be made without triggering the penalty regime.
This issue requires careful coordination between the US and UK agreements. The agreements should be structured so that a termination event under the US agreement (triggering severance) also constitutes or is accompanied by a separation from service under Section 409A. Practical options include: (a) providing that termination of the US agreement automatically triggers termination of the UK agreement, or (b) providing that upon termination of the US agreement, Mr. Harding's services under the UK agreement will be reduced to a level at or below 20% of his prior service level, such that a separation from service occurs.
Six-Month Delay for Specified Employees. Section 409A(a)(2)(B)(i) provides that, if an executive is a "specified employee" (as defined under Section 409A), payments of deferred compensation that are triggered by a separation from service cannot be made until the date that is six months after the date of separation from service (or, if earlier, the date of the executive's death). A "specified employee" is generally defined as a key employee (within the meaning of Section 416(i) of the Code) of a corporation any stock of which is publicly traded on an established securities market. See Treas. Reg. § 1.409A-1(i). NTP US is a wholly-owned subsidiary of NTP PLC, a company whose ADRs are publicly traded on the NYSE. Under the Treasury regulations, if any member of the controlled group is publicly traded, the specified employee rules apply to all members of the group. Accordingly, Mr. Harding will almost certainly be a "specified employee" upon the commencement of his employment (as one of the highest-compensated officers of the group), and any severance payments that constitute deferred compensation subject to Section 409A will be subject to the six-month delay.
NTP US (or NTP PLC) must maintain a specified employee identification process in accordance with the Treasury regulations, including the establishment of a specified employee identification date and a specified employee effective date. The employment agreement should include a provision expressly addressing the six-month delay, providing that any payments subject to the delay will be accumulated and paid in a lump sum on the first business day following the expiration of the six-month period (or upon the executive's earlier death).
Short-Term Deferral Exception. Payments that are made within 2½ months after the end of the taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture may be exempt from Section 409A under the short-term deferral exception. See Treas. Reg. § 1.409A-1(b)(4). The proposed sign-on cash bonus of $5,000,000, which is payable within 30 days of Mr. Harding's start date (October 1, 2024), should qualify for the short-term deferral exception, as the right to payment vests upon commencement of employment and payment is made well within the 2½-month window.
However, the 24-month clawback provision applicable to the sign-on bonus introduces a potential complication. If the clawback is structured such that the bonus remains subject to a "substantial risk of forfeiture" during the 24-month clawback period (i.e., Mr. Harding must repay the bonus if he voluntarily resigns within 24 months), the short-term deferral exception may not be satisfied at the time of payment. The Treasury regulations provide that a substantial risk of forfeiture exists only if entitlement to the amount is conditioned on the future performance of substantial services or upon the occurrence of a condition related to a purpose of the compensation, and the possibility of forfeiture is substantial. A requirement to repay a sign-on bonus upon voluntary resignation may or may not constitute a substantial risk of forfeiture depending on the specific facts. To preserve the short-term deferral exception, the clawback should be structured as a repayment obligation (rather than a condition on the right to receive the bonus), and the right to the bonus should be treated as vested upon payment. This structure should be reviewed carefully with tax counsel.
Separation Pay Exception. Treasury Regulation § 1.409A-1(b)(9)(iii) provides an exception from Section 409A for involuntary separation pay—that is, payments made on account of an involuntary separation from service (including a separation for good reason that qualifies under the safe harbor). The exception applies to the extent that the aggregate payments do not exceed the lesser of (a) two times the executive's annualized compensation based on the annual rate of pay for the taxable year preceding the taxable year of the separation from service, or (b) two times the limit on compensation under Section 401(a)(17) of the Code (which is $345,000 for 2024, yielding a separation pay exception cap of $690,000). Given that Mr. Harding's proposed severance quantum is $9,625,000 (non-CIC) or $12,031,250 (CIC), the separation pay exception will cover only a small fraction of the total severance. The excess—the vast majority of the severance—will be subject to Section 409A requirements, including the six-month delay for specified employees, the requirement that payments be made on a fixed schedule or upon a permissible payment event, and the prohibition on acceleration of payments.
As a practical matter, this means that the severance payments should be bifurcated into two tranches: (i) a Section 409A-exempt tranche (up to the separation pay exception limit), which may be paid immediately upon separation from service without regard to the six-month delay, and (ii) a Section 409A-compliant tranche (the excess), which must be paid in compliance with Section 409A timing requirements, including the six-month delay for specified employees.
Change in Control Definition Alignment. The Section 409A definition of a "change in control event" is set forth in Treasury Regulation § 1.409A-3(i)(5) and encompasses three categories: (a) a change in ownership of the corporation, (b) a change in effective control of the corporation, and (c) a change in the ownership of a substantial portion of the corporation's assets. These categories are defined with specificity in the regulations and do not necessarily align with the contractual CIC definition being negotiated by the parties.
This misalignment creates risk. If CIC severance constitutes deferred compensation subject to Section 409A, it can be paid upon a Section 409A "change in control event" only if the contractual CIC event also constitutes a change in control event under Section 409A. If the contractual CIC definition is broader than the Section 409A definition (e.g., if the Board turnover trigger does not satisfy any of the Section 409A categories), CIC severance triggered by an event that is a contractual CIC but not a Section 409A change in control event cannot be paid at the time of the CIC—it can only be paid upon a separate permissible payment event, such as a separation from service. Under a double-trigger structure, this issue is mitigated because the CIC severance is triggered by a qualifying termination (separation from service) following the CIC, and the payment can be made upon the separation from service (subject to the six-month delay). However, if the agreement includes any single-trigger CIC provisions (e.g., immediate equity acceleration upon CIC), the Section 409A alignment issue must be addressed.
The contractual CIC definition should be drafted to align with, or cross-reference, the Section 409A definition to the extent practicable. At a minimum, the agreement should include a provision stating that, to the extent any payment constitutes deferred compensation subject to Section 409A, a "change in control" shall be deemed to have occurred only if the event also constitutes a "change in control event" within the meaning of Treasury Regulation § 1.409A-3(i)(5).
Good Reason Definition Safe Harbor. The Treasury regulations provide a safe harbor definition of "good reason" for purposes of the involuntary separation pay exception. See Treas. Reg. § 1.409A-1(n)(2)(ii). Under the safe harbor, a voluntary separation from service is treated as an involuntary separation if the separation is due to the occurrence of one or more specified conditions (without the executive's consent), the executive provides notice to the employer within a reasonable period (not to exceed a period specified in the regulations) after the initial occurrence of the condition, the employer is given a period of at least 30 days to remedy the condition, and the executive separates from service within a specified period after the condition is not remedied. The contractual good reason definition should be drafted to track the safe harbor requirements or should be carefully analyzed against them to ensure that good reason resignations qualify as involuntary separations for Section 409A purposes.
C. Drafting Recommendations
Based on the foregoing analysis, I recommend the following Section 409A–related drafting provisions for the Harding employment agreement:
1. Include a comprehensive Section 409A compliance provision stating the parties' intent that all payments and benefits under the agreement comply with Section 409A or qualify for an exemption from Section 409A, and that the agreement shall be interpreted and administered accordingly.
2. Include a six-month delay provision for specified employees, providing that any payment of deferred compensation triggered by a separation from service shall be delayed until the date that is six months and one day after the date of separation from service (or the date of death, if earlier), with accumulated payments paid in a lump sum on the first business day following the expiration of the six-month period.
3. Bifurcate severance payments into a Section 409A-exempt tranche (the portion within the separation pay exception) and a Section 409A-compliant tranche (the excess), with separate payment timing for each tranche.
4. Align the contractual change in control definition with the Section 409A definition of "change in control event" to the extent possible, and include a conforming provision ensuring that payments subject to Section 409A are made only upon a Section 409A-compliant event.
5. Include a savings clause providing that, to the extent any payment under the agreement would otherwise violate Section 409A, the payment timing shall be adjusted to the minimum extent necessary to comply with Section 409A, and that the parties will cooperate in good faith to restructure the payment to achieve the intended economic result while complying with Section 409A.
6. Specify that each installment payment of severance (if severance is paid in installments rather than a lump sum) is treated as a separate payment for purposes of Section 409A. See Treas. Reg. § 1.409A-2(b)(2)(iii).
7. Confirm the intended Section 409A treatment of equity awards. Section 409A generally does not apply to equity awards that qualify as "stock rights" under Section 409A—specifically, stock options and stock appreciation rights granted with an exercise price at or above fair market value, and restricted stock units and performance share units that are settled in shares within the short-term deferral period. T