The Law of Corporations and Other Business Organizations

Lecture Notes

Executive Compensation

1. Compensation paid to corporate executives
may include salaries, bonuses, stock bonuses,
stock options, and several other
types of benefits.
2. Section 162(m) of the Internal Revenue
Code disallows the deductibility of certain
corporate executive compensation
that exceeds $1 million per year, unless
the compensation in excess of $1 million
is part of a performance-based plan that
meets certain criteria.
3. Executive compensation often includes
stock options that give the holder of the
option the right to buy shares of stock at
a specific price within a specified period
of time.
4. Corporate executive compensation packages
often include golden parachutes—
agreements to protect the executive with
a severance bonus under certain circumstances,
including a corporate takeover.
Employee Benefits and Qualified Plans
5. Employers may elect to adopt a variety of
employee benefit plans, including pension
plans and welfare benefit plans.
6. Plans that meet certain requirements of
the Internal Revenue Code and qualify
for special tax treatment are referred to as
qualified plans.
7. Employers are allowed a tax deduction
for their contributions to qualified plans.
8. Investment income earned on contributions
to qualified plans is generally tax
free until distributed to plan participants.
9. Participants of qualified plans can defer
their income tax liability on the amount
of their contributions until they receive
the benefit from the plan in the future.
10. Qualified plans are subject to provisions
of the IRC and ERISA.
11. To receive the tax incentives provided for
in the IRC, corporations must comply
with IRC provisions that establish rules
for the following:
• Plan participation
• Plan coverage
• Vesting of plan contributions
• Other provisions regarding the funding
and administration of the employee
benefit plan
Qualified Pension Plans
12. Qualified pension plans are qualified
plans that are designed to provide retirement
income to participants in either a
lump sum or in the form of an annuity.
13. Contributions made to a qualified pension
plan are held in a trust, where they
are managed until fully distributed.
14. Qualified plans must meet certain vesting
requirements set forth in ERISA.
15. Employees are always 100 percent vested
in any contribution they make to qualified
plans.
16. ERISA provides that any employee who
has at least five years of service with an
employer must have a nonforfeitable
right to 100 percent of his or her accrued
benefits under qualified plans, unless the
plan provides for gradual vesting that begins
after three years of service and includes
100 percent vesting after seven
years of service.
17. Defined benefit pension plans are those in
which the benefit payable to the participant
or the participant’s beneficiaries is definitely
determinable from a benefit formula set
forth in the plan.
18. Defined contribution plans establish individual
accounts for each participant and
provide benefits based solely on the amount
contributed to the participant’s account.
19. Profit-sharing plans are the most common
type of defined contribution plan.
20. A 401(k) plan allows employees to elect
to defer a certain percentage of their
compensation each year to provide for
their own retirement benefits. Contributions
may be made by both the employer
and employee.
21. An employee stock ownership plan
(ESOP) is a type of qualified plan that
gives partial ownership of the corporation
to the corporation’s employees. Distributions
may be made to participants in the
form of stock or cash.
22. A Keogh is a type of qualified plan available
to self-employed individuals.
23. Sponsors of employee benefit plans may
request favorable determination letters from
the Internal Revenue Service to ensure that
their plans will be considered qualified
plans by the IRS.
24. Employers can also elect to adopt nonqualified
plans, plans that are not required
to comply with all the rules established
for qualified plans. Plan sponsors who
wish to discriminate in favor of highly
compensated employees often choose to
adopt a nonqualified plan because nonqualified
plans are not subject to the nondiscrimination,
funding, participation,
and vesting requirements of qualified
plans.
Employee Welfare Benefit Plans
25. Employee welfare benefit plans are plans
designed to provide participants and their
beneficiaries with medical, dental, disability,
and/or life insurance, and similar
benefits.
Employment Agreements
26. Most employees are employees at will.
That means they are hired for an agreedupon
compensation, and they can be dismissed
at the employer’s discretion—
with or without cause.
27. An employment agreement sets forth the
rights and obligations of the employer
and employee.
28. Some of the benefits for employers entering
into an employment agreement include
the following:
• The employer can be reasonably assured
of hiring and retaining the services
of the individual for a specific
period of time.
• An employment agreement with a
specialized, valued employee will ensure
that the employee will not be
working for the competition during
the specified time period.
• The employment agreement can help
to ensure the employee’s confidentiality
with regard to trade secrets,
work products, and business strategies.
• The employer can be reasonably certain
of the cost for hiring and retaining
the employee for the time period
specified in the employment agreement.
29. Disadvantages to the employer entering
into an employment agreement include the
following:
• It may be difficult to dismiss an employee
who has an employment
agreement.
• The compensation agreed to in the
employment agreement may become
a financial burden if the employee
and the employer’s business do not
generate expected profits.
30. Employees can benefit from an employment
agreement because of the following:
• An employment agreement assures the
employee of continued employment
for a definite time period at a definite
rate of compensation.
• The employment agreement can formalize
promised benefits, incentives, or
rewards.
31. Disadvantages to employees entering into
employment agreements include the following:
• An employee may be committed to a
position that does not meet his or her
expectations.
• Within certain limitations, an employment
agreement may restrict the
employee’s actions with regard to future
employment.
Drafting the Employment Agreement
32. An employment agreement is considered
a binding contract on both the employer
and employee, and must therefore include
all elements of a contract.
33. A covenant not to compete restricts the
future employment and actions of the
employee. Covenants not to compete are
only enforceable if they are considered
reasonable.
34. The following information is usually included
in an employment agreement:
• The name and address of the employer
• The name and address of the employee
• The date the agreement is entered into
and the length of the agreement
• The duties of the employee
• The promise of the employee to
maintain trade secrets
• The agreement of the parties with regard
to ownership of inventions made
by the employee during the course of
employment
• The agreement of the parties with regard
to applying for and owning any
patents that may be obtained as a result
of the employee’s work
• The agreed-upon compensation to be
paid to the employee
• The general terms of any special
compensation plans that may be
available to the employee, including
pension plans, deferred compensation
plans, incentive bonus plans, and
stock options
• Terms of the employee’s expense account
and covered travel expenses
• The terms of a covenant not to compete
• A description of the welfare benefits
offered to the employee, including
life and disability insurance, medical
insurance, dental insurance, and
workers’ compensation
• Vacation time granted to the employee
• Holidays that the employee will have
off work
• The terms under which the contract
may be assigned by the employer or
employee
• Conditions for termination of employment
• The right of either party to terminate
the agreement with proper notice
• Remedies for breach of the contract
• Arbitration or mediation of disputes
The Paralegal’s Role
35. Paralegals are often involved in drafting
qualified plans and supplementary documents
and in submitting the application
for a determination letter to the IRS. Paralegals
also assist with researching employment
matters and drafting employment
agreements.
CASE BRIEFS
Beckman v. Cox Broadcasting Corporation,
250 Ga. 127, 296 S.E.2d 566, 36 ALR4th
1132 (1981)
Purpose: This case demonstrates the enforceability
of a noncompetition clause in an employment
agreement when the noncompetition
clause is limited as to time period and geographic
location.
Cause of Action: This is a declaratory judgment
action to ascertain the validity of a restrictive
covenant under Georgia law.
Facts: From 1962 until June 1982 plaintiff
Beckman was employed by Cox Broadcasting
Corporation as a meteorologist and “television
personality.” Beckman’s employment agreement
with Cox provided, among other things,
that the “Employee shall not, for a period of
one hundred-eighty (180) days after the end of
the Term of Employment, allow his/her voice
or image to be broadcast ‘on air’ by any commercial
television station whose broadcast
transmission tower is located within a radius
of thirty-five (35) miles from Company’s offices,
unless such broadcast is part of a nationally
broadcast program.”
On July 1, 1981, Beckman entered into
a five-year contractual agreement with WXIATV,
a competitor of Cox, to commence working
for WXIA as a meteorologist and television
personality when his contract with Cox
expired on July 1, 1982.
Cox was made aware of Beckman’s
plans, and in July 1981, Cox filed a petition
for declaratory judgment, Ga. Code Ann. §
110-1101, seeking a determination that the
restriction against competition in its employment
agreement with Beckman was valid.
Finding that there was no evidence to
conclude that WXIA-TV would require
Beckman to violate the restrictive covenant, or
that Beckman would violate the covenant, the
trial court dismissed the action.
On June 16, 1982, Beckman formally
demanded to be released from the restrictive
covenant in his contract. When Cox refused,
Beckman filed a declaratory judgment action
to ascertain the validity of the restrictive covenant
under Georgia law. The trial court found
that the employment contract between Beckman
and WXIA-TV did not require Beckman
to appear on the air during the first six months
of his employment. The court further found
that during the term of Beckman’s employment
with Cox, WSB-TV spent in excess of a
million dollars promoting Beckman’s name,
voice, and image and that Beckman is one of
the most recognized television personalities in
the Atlanta area. The court also found that
WSB has instituted a transition plan to reduce
the impact of Beckman’s departure on the station’s
image and that to permit Beckman to
appear on air in the Atlanta area during the
first six months of his contract with WXIATV
would disrupt the plans and ability of
WSB-TV to adjust to the loss of Beckman.
The trial court ruled that the restrictive
covenant is valid under Georgia law. Beckman
appealed, arguing that the covenant was
broader than necessary for Cox’s protection.
Beckman also argued that the detrimental impact
of the restrictive covenant on him outweighs
the need to protect the interests of
WSB-TV.
Issue: Given the foregoing facts, is the restrictive
covenant found in the employment
agreement valid in the state of Georgia?
Holding: Yes
Reasoning: Because the restrictive covenant
is for a limited time and a narrowly restricted
area, defendant is entitled to enforce the restrictive
covenant with the plaintiff.
Cubic Corporation v. Marty, 185 Cal. App. 3d
438, 229 Cal. Rptr. 828, 1 SUPQ2d 1709, 66
ALR4th 1115 (1986)
Purpose: This case demonstrates the validity
of an assignment of inventions found in an
employment agreement.
Cause of Action: Action for declaratory relief
as to ownership of a patent
Facts: When defendant William B. Marty Jr.
began employment with Cubic Corporation in
December 1976, he entered into an invention
and secrecy agreement that provided that he
would disclose all inventions coming within
the scope of Cubic’s business or related to Cubic’s
products or research or production work,
or to any problems specifically assigned to the
employee, whether or not conceived during
regular working hours. Under the agreement,
all such ideas and inventions became the sole
and exclusive property of Cubic.
In mid-May 1977, Marty came up with
an idea for an electronic warfare simulator for
training pilots. He developed a block diagram
in May 1977 and in June 1977 a manuscript
describing his invention. Marty submitted his
plan to his superiors at Cubic, one of whom
made some technical comments on Marty’s
manuscript. Cubic funded an internal project
to study Marty’s invention. Marty used a Cubic
computer programmer to help design necessary
circuitry because his background in microprocessors
was weak.
On the basis of the developed invention,
Cubic submitted a proposal to the Navy
for Marty’s invention under the name of one
of Marty’s superiors. Cubic received a government
contract to study Marty’s invention,
and Marty was made program manager. Marty
was also given a higher-than-average pay
raise.
In June 1978, without telling Cubic,
Marty applied for a patent on his invention.
The patent was issued in December 1979.
Marty’s patent attorney forwarded a copy of
the patent to Cubic and offered to discuss giving
Cubic a license under the patent. Cubic
took the position that the patent belonged to it
under the agreement Marty had signed. Cubic
offered to reimburse Marty’s expenses in obtaining
the patent if he assigned it to Cubic.
When Marty refused and was told that his
continued employment at Cubic was continCHAPTER
gent on his assigning the patent, his employment
was terminated in early 1980.
Cubic filed a complaint against Marty
seeking declaratory relief as to ownership of
the patent and alleging breach of contract,
breach of confidential relationship and trust,
interference with prospective economic advantage,
and specific enforcement of the secrecy
and invention agreement. Marty crosscomplained
for wrongful discharge, breach of
contract, fraudulent misrepresentation, breach
of confidential disclosure, copyright infringement,
defamation, and injunction.
The trial court awarded the patent to
Cubic and $34,102 in damages resulting from
a government withhold on a Cubic contract
(subject to a credit to Marty if and when the
amount was recovered from the government).
On appeal Marty contended, in part,
that the agreement was not enforceable because
there was inadequate consideration to
support a promise to convey the invention to
Cubic. Marty also contended that the agreement
was an unconscionable adhesion contract
and therefore unenforceable.
Issue: Given the foregoing circumstances, is
an agreement for the assignment of inventions
between an employee and an employer enforceable?
Holding: Yes
Reasoning: The consideration given to Marty
was adequate, and though the agreement was
an adhesion contract, it was not unconscionable,
and was therefore enforceable.