A Look At Executive-Friendly "30 Day Cure Periods"

Back in mid-July, United Rentals Inc. announced that president and chief financial officer John Milne failed to perform his duties and would be fired if he does not remedy matters within the "30-day cure period" under his employment agreement.

The Greenwich, Conn., equipment rental company said at the time that the action was taken on the recommendation of the special committee of the board, which was reviewing issues related to a Securities and Exchange Commission investigation—Milne said he was not willing to respond to the committee’s questions. The regulator was probing several short-term, equipment sale-leaseback transactions. In addition, the company said that the accounting for a number of transactions for the three years ended 2002 was incorrect, and that "the special committee is continuing to review these transactions as part of its broader review relating to the SEC inquiry."

Last week—30 days later—United announced that Milne was fired after refusing to cooperate with an investigation into the company’s accounting practices.

The company added that it terminated Milne “for cause,” because he was unwilling to respond to questions related to the SEC inquiry. The company said the finance executive was not entitled to any severance payment because he was fired for cause. He will also forfeit 275,000 performance units, part of the company’s cash-based Long Term Incentive Plan, and 120,000 stock units awarded under the company’s 2001 Senior Stock Plan.

Executive-Friendly Clause

The United situation has drawn attention to a seemingly obscure provision of employment contracts—cure periods. But, according to headhunters, compensation experts and attorneys, cure periods are not so rare. “They are pretty common,” says Carol Silverman, principal with Mercer Human Resource Consulting.

Savino

“It gives the executive or the company an opportunity to correct conduct that the other party believes is a breach of contract,” adds Angelo Savino, partner at Mound Cotton Wollan & Greengrass.

For example, earlier this year, tiny Diomed Holdings, a marketer of minimally invasive medical technologies, modified the employment contracts of CFO David Swank, allowing the company to terminate Swank's employment for cause upon written notice and “subject to a 30-day cure period in certain instances.”

Also earlier this year, $152.9 million Intersections, a provider of identity theft protection and credit management services, entered into an employment agreement with chief technology officer George “Chip” Tsantes. The agreement provides that in the event of termination by the company without cause or by Tsantes for good reason, Tsantes will be entitled to certain compensation and benefits. “For purposes of the agreement, good reason means, after notice and a 30-day cure period,” the SEC filing points out.

Intermix Media, a $79 million e-commerce company, also calls for a 30-day cure period in its employment agreement for its chief operating officer, Sherman Atkinson.

Richman

Ron Richman, an attorney with Schulte Roth & Zabel, says you usually find cure periods in two places. First, when an employer has the right to terminate an executive for cause, the executive has the right to cure something, as long as it is curable. “In that situation, you have the employee pushing for that [provision],” Richman explains. An executive would want the clause should he be terminated with cause to provide him with the opportunity to “cure” conduct that the company believes is a breach. Then, he may get to keep his job, or, at the least, “severance may be available,” Savino explains.

“It’s an executive friendly clause,” asserts Doug Friske, managing principal at Towers Perrin. “It lets people address oversights.”

Then, there is the flip side, when the employee has the right to terminate an employment agreement for “good reason,” and the employer has the right to cure. This could occur if the employer changes the individual’s job description, moves him to another location or tries to change his compensation arrangement, Silverman explains. The “cure period” provides the company an opportunity to fix the situation.

“Companies may want the provision because they have invested a great amount of resources and want to cure and not terminate, and use [the provision] for them to comply with a request,” Savino explains.

The cure period is usually valuable “to deal with something inadvertent,” Silverman points out.

Much At Stake

Richman at Schulte Roth & Zabel says these “cause” and “good reason” provisions are not uncommon, but usually they are included in the employment agreement. “The point is, if there is some sort of a problem, you might as well have a provision to work out a problem,” Richman adds. “It gives the parties an opportunity to look at stuff before they kill each other,” he quips.

In most cases, there is much at stake when “cure periods” come into play; namely, severance. That’s because if an executive is fired but not for cause, the individual is typically entitled to numerous compensation triggers, including severance, the ability to exercise stocks options, and other forms of compensation. The same is true if the executive is able to resign for “good reason.”

However, if the individual is fired for “cause,” as United Rentals declared in the case of Milne, then the executive loses out on severance and a lot of other forms of remuneration.

As a result, says Richman, it is usually the executive who is pushing for the inclusion of cure period clauses. However, he notes that it is very rare not to find contracts that call for cure periods for cases involving both “cause” and “good reason.”

“Sometimes, you see language [that calls for a] cure but it does not apply to all things that count toward cause,” he points out.

In addition, Richman notes that typical cure period lasts for 30 days. However, he has seen cure periods range from 10 days to 60 days. For example, Q Comm International recently entered into an employment agreement with Chief Executive and President Michael Keough that calls for a 15-day cure period.

“I think 30 days is a long time,” adds Richman, especially in cases where cures are unlikely, and the executive simply sits around waiting to be fired.