Employment Agreements in a Down Market

 We’re in the process of adding another web developer to our talented team, and we thought it made sense to update our employment agreements.  Of course, in doing this we have an advantage since one of our web properties has over twenty thousand employment contracts among the millions of legal agreements and clauses from the top law firms and companies in the world.  The property, RealDealDocs.com, is used by tens of thousands of legal and business professionals to find legal documents to use in their research and drafting.

We’ve previously discussed employment agreements on our legal agreements blog, so let me just briefly review some of the key elements before talking about how we’re looking to tailor our employment contracts.  These key elements of employment agreements include:

1. Term. First, this provision should list the employee’s annual salary. Also, any agreement regarding the option to renew the agreement, either on the executive’s side, the company’s side, or both, should be addressed.
2. Duties of Employee. If the precise services of the employee may be extended or curtailed by mutual agreement, this should be listed as well.
3. Duties of Employer. The employer should promise to pay all compensation, benefits, and allowances as set forth in the agreement.
4. Confidential Information. The employee must promise to keep all secret information confidential.
5. Termination. The relevant termination provisions should be carefully spelled out.  If the employer may only terminate the employee for cause, then cause must be defined.  In at will states, such as for California employment agreements, this should be delineated.

Other elements include appropriate non-competition / non-disclosure agreements, intellectual property transfers, etc.  I’ll review those in a separate post shortly.

We’ve had most of the issues well covered, so the primary employment agreement related issue we’re working on is to better tie performance to compensation.  Additionally, for this hire in particular, we’re looking to defer some portion of the compensation to the end of the year in the form of a retention bonus.  The reason for this is that  we are looking to hire a rather junior level position and we want to make sure we realize our investment in his development.

Asset Purchase Agreements vs Stock Purchase Agreements

We were contemplating acquiring a small legal content provider in our space with an unusual set of circumstances surrounding its capital structure.  As we were working through fit and valuation issues, it became apparent that the structure of the deal would be even more important than usual.

There are many ways to structure the acquisition of a corporation, but in any event they can be boiled down to two simple forms:  asset purchase agreements or stock purchase agreements. 

Asset purchase agreements (more links to real transactions from top law firms and public companies provided) are used to acquire the existing assets of a company, rather than the entire ownership interest in the company.  As such, they are generally preferred by the buyer for several reasons:

1. Most importantly, they limit exposure to buyers from any known or unknown liabilities relating to the target company
2. The buyer can choose to acquire only certain assets
3. The buyer can avoid unfavorable obligations such as pension liabilities, collective bargaining agreements, etc.
4. Asset purchase agreements can also result in potentially favorable tax treatment

Of course, from the seller’s perspective, many of these issues are the inverse of what the seller may want, such as the complete sale of the company including any liabilities.  That’s why sellers tend to prefer stock purchase agreements when they enter into a company sale.

In our case, we are in the process of winding down our discussions and it seems unlikely there will be  a deal here.  I’ll update this post if anything changes.