Here come the Severance Agreements and the layoffs

Along with the recent extraordinary activity on Wall Street (Bear Stearns, Merrill Lynch, AIG, Lehman Bros, etc.), we all anticipate a very significant loss of jobs on Wall Street which will affect the country generally and New York City in particular.  With apologies for the lame metaphor, these ramifications will spread like ripples in a pond, far beyond the immediate job impacts for the investment advisors, financial analysts, and brokers and affect the asset values of financial institutions and the millions of their stakeholders throughout the world.

Along with the orderly (and disorderly) dissolution of these companies, we will see a tremendous number of layoffs and voluntary departures of employees.  Depending on the situation, in many cases the company will offer to enter into an employee termination agreement, also known as a severance agreement, in which it wil offer some form of compensation in return for a promise by the employee not to sue for unlawful termination. 

A helpful definition of a severance agreement is provided here, but what is probably most useful is to see a number of actual employment termination agreements and severance agreements, and I’ve provided links to these legal agreements as well.  I’ve also provided a link to a search tool which will let you find employment termination and severance agreements by state governing law clauses, as it is pretty important to focus employment agreements, including severance agreements, down to the individual state level.

For highly compensated employees, IRC Section 409a will come into play, about which I’ve written a number of posts.  For those of you looking for links to employment and severance agreements involving Section 409a, I’ve provided a link as well.

Best of luck to everyone involved in this extraordinary contraction on Wall Street.

Now that Uncle Sam owns AIG…

What does that mean for American International Group (AIG) shareholders, employees, and other stakeholders, as well as the world financial markets?  Well, hopefully, we all have a bit more time to catch our collective breath and look for a more orderly sale of AIG assets (in excess of $1.1 trillion) to pay back the $85 billion loan that the Federal Reserve put together, in return for a 79.9% stake in the company.  If those assets were pushed onto the market in a fire sale, and other financial institutions were then forced to write down their related assets to the new, lower market values, the cascading effect would be devastating.

In its statement, the Fed noted that the “disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance…this loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.”

As of this writing, I don’t believe the public has seen the underlying agreements around this transaction, which is structured as a secured loan agreement with a 24 month term, and I’m frankly not sure how the equity side of the transaction has been structured.  Update:  as additional consideration for providing the bridge loan, the Fed also received warrants to purchase stock in AIG.

The Fed did indicate that “the loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries.”  Let’s hope that the Fed and AIG together are able to liquidate the proceeds for something in excess of the $85 billion line that the Fed has advanced, and that the taxpayers may yield a profit over the course of the next two years.

Drafting Capital Support Agreements

We received a call to our support line recently from a www.RealDealDocs.com subscriber concerning capital support agreements.  Capital support agreements, also know as capital call agreements or just support agreements, are agreements by an investor obligating that entity to make investments in another company, most often a borrower, given a certain set of circumstances.  The subscriber, an attorney in New York, was looking for some samples to leverage for a current client.

 

We discussed how to find a number of sample capital support agreements on both our agreements and contracts preview site as well as the member site from across the millions of legal agreements and clauses that have been organized for easy access, and we found a number of these capital support agreements in about ten seconds.  We also briefly talked about how and when they are used. 

She pointed out that she had worked on a couple similar deals in the past year given the illiquidity in the credit markets, and that there are several specific reasons to use them as a means to assist a borrower to obtain funding without obtaining a letter of credit or other form of loan guaranty.  This is particularly when there is a wide divergence between the underwriting requirements of the lender, who might be looking for more favorable leverage or interest coverage requirements, and a shareholder-backer of the borrowing entity, who is in essence guarantying the financial performance of the borrower over a period of time.  For example, early stage or venture backed borrowers, or in for borrowers in the midst of loan workout situations, frequently don’t have the ability to meet traditional lender capitalization requirements.