Campbell et al v. Potash Corp. of Saskatchewan, Inc.

• Decision Date: 09 March 2000
• Docket Number: Nos. 99-5074,99-5079,99-5077,s. 99-5074
• Parties: (6th Cir. 2001) J. Douglas Campbell, (99-5074), Peter H. Kesser (99-5077), and Alfred L. Williams, Jr. (99-5079), Plaintiffs-Appellees, v. Potash Corporation of Saskatchewan, Inc., a Saskatchewan Corporation, Defendant-Appellant. Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 792

238 F.3d 792 (6th Cir. 2001)

J. Douglas Campbell, (99-5074), Peter H. Kesser (99-5077), and Alfred L. Williams, Jr. (99-5079), Plaintiffs-Appellees, v. Potash Corporation of Saskatchewan, Inc., a Saskatchewan Corporation, Defendant-Appellant.

Nos. 99-5074, 99-5077, 99-5079

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: March 9, 2000

Decided and Filed: February 2, 2001

Appeal from the United States District Court for the Western District of Tennessee at Memphis: Nos. 97-02425; 97-02426; 97-02428, Jon Phipps McCalla, District Judge. [Copyrighted Material Omitted] Jef Feilbelman, Burch, Porter & Johnson, Memphis, TN, Richard L. Fenton, Lori Anne Ward, Sonnenschein Nath & Rosenthal, Chicago, IL, for Appellees.

Daniel H. Bromberg, Robert H. Klonoff, JONES, DAY, REAVIS & POGUE, Washington, D.C., Bruce S. Kramer, Jeff Smith, BOROD & KRAMER, Memphis, Tennessee, for Appellant.

Before: NELSON, BOGGS, and NORRIS, Circuit Judges.

OPINION

BOGGS, Circuit Judge.

The Potash Corporation of Saskatchewan, Inc. ("PCS") appeals from the district court's partial grant of summary judgment and its judgment after trial in favor of plaintiffs-appellees J. D. Campbell, Peter Kesser, and Alfred Williams, Jr., all former executives of the Arcadian Corporation. Campbell (the former President and CEO), Kesser (the former Vice-President and General Counsel), and Williams (the former Vice-President and CFO) sued PCS for breach of contract approximately two months after its successful March 6, 1997 merger with Arcadian, because PCS refused to make severance payments to the executives triggered under those executives' employment agreements ¹ by the change in corporate control of Arcadian and additional "good cause."

PCS moved to dismiss plaintiffs' charges for failure to join PCS Nitrogen (the merger subsidiary wholly owned by PCS into which Arcadian was absorbed) as an indispensable party. The district court denied that motion on September 16, 1997. PCS and PCS Nitrogen filed suit in Tennessee state court against plaintiffs at about that time, claiming breach of fiduciary duties by the executives, and seeking a declaration that the employment agreements were unenforceable. Plaintiffs removed that case to federal court claiming ERISA pre-emption, but it was remanded back on July 21, 1998.

Having received cross-motions for summary judgment, the district court granted partial summary judgment to plaintiffs on August 13, 1998, rejecting PCS's arguments that the severance agreements were void for lacking consideration and for contravening public policy, and holding that the contracts were enforceable against PCS. At the bench trial that began August 17, the court heard testimony regarding the proper construction of the multiplier clause in the severance agreements. The court then rendered a November 18 judgment that accepted the plaintiffs' interpretation of most aspects of the multiplier clause, and it ordered PCS to pay plaintiffs' attorney's fees and tax penalties. On December 1, after having received revised calculations from the parties in accord with its earlier decision, the court issued a revised opinion awarding precise damages. We agree with the district court's judgment concerning the contract consideration and public policy issues; however, we disagree slightly with its damage calculation. Therefore, we will affirm the district court in part, reverse it in part, and remand the case for revisions in the calculation of damages.

I

PCS, a Saskatchewan fertilizer corporation, approached Arcadian, a Tennessee fertilizer corporation, about a possible merger in August 1996. The Arcadian board decided to pursue the overture on August 27, and heard a presentation on proposed severance plans at that time. Over Labor Day weekend, Arcadian and PCS negotiated the terms of the merger and the severance agreements. PCS's Executive Committee and the Arcadian board approved and executed the merger agreement at respective board meetings on September 2. After approving the agreement, the Arcadian board approved employment agreements for nine senior executives that included so-called golden parachutes. See Brown v. Ferro Corp., 763 F.2d 798 (6th Cir. 1985) (discussing the operation of golden parachute severance agreements). Campbell, Kesser, and Williams signed employment agreements containing these parachutes three days later. The "golden parachute" portion of the severance package provided a formula to compensate senior executives in case of a change in corporate control accompanied by a material change in the executive's position at the new company. In such a circumstance, the executive could leave the company and receive an aggregate payment in one lump sum within 30 days of termination, totaling:

an amount equal to the sum of (A) three (3) times Executive's Base Salary in effect at the time of [the Executive's] termination . . . , (B) three (3) times the average of all bonus, profit sharing and other incentive payments made by the Company to Executive in respect of the two (2) calendar years immediately preceding such termination, and (C) the pro-rata share of Executive's target bonus, profit sharing and other incentive payments for the calendar year in which such termination occurred . . . .

¶4.3(c)(1)(ii) of the Employment Agreement.

Arcadian's compensation system historically emphasized incentives, enhancing an industry median base salary with supplemental incentive payments for meeting performance targets as well as profit-sharing payments and additional bonuses. Under the 1994 profit-sharing plan (only), appellees were also eligible for performance-based SARs (stock appreciation rights) and CESARs (cash equivalent SARs), which vested ratably over three years after they were granted. In addition to the formal plan, Arcadian distributed other stock options without regard to company performance. It also contributed 4% of each employee's annual compensation into an Employee Stock Ownership Plan (ESOP) and into a Supplemental Executive Retirement Plan (SERP) for certain higher-salaried employees whose income level precluded their full participation in an ESOP.

At PCS's insistence during the Labor Day weekend discussions, Arcadian reduced the number of secondary events that could trigger the golden parachutes following a change in corporate control, and devised a formula based on actual compensation for the two calendar years preceding termination rather than on expected compensation for the two years following termination. Ironically, the look-back formula was adopted in part because PCS felt a retrospective formula would be less contestable than a prospective one. PCS also requested that the multiplier be limited to salary and bonuses, but Arcadian indicated that its pay structure was too incentive-laden for that to be feasible. Bruce Jocz of Bracewell & Patterson, Kesser's former law firm, drafted the clause under Kesser's direction². In Jocz's brief presentation to the board following approval of the merger, no mention was made of whether the "other incentive payments" in the multiplier formula included long-term incentives. Rather, Jocz's summary described the formula as 3 times base salary, plus 3 times prior years' average profit-sharing and bonus, plus a pro-rata share of current year's profit-sharing or bonus. Arcadian Executive Charles Lance presented slides suggesting that the multiplier totaled 36 months of salary and bonus. However, in a mid-September spreadsheet prepared for PCS and its outside benefits consultant (Richard Davenport of Deloitte & Touche) calculating the golden parachutes, Lance did include stock rights, stock options, and performance-based SARs and CESARs from the 1994 profit sharing plan in the multiplier formula (but, perhaps inadvertently, left other individual SARs out of it)³. Lance sent PCS copies of all Arcadian benefit plans for due diligence purposes.

Several weeks later, Lance added the individual SARs, CESARs, ESOPs and SERPs to the spreadsheet, and Davenport added some other accidentally omitted long-term incentives to correct the spreadsheet. Lance drafted administrative guidelines interpreting the variable components of the multiplier clause. Arcadian's accounting department calculated potential severance payments based on a 1996 and a 1997 merger closing, which Arcadian's outside auditors Peat Marwick then reviewed. The compensation committee reviewed and approved the administrative guidelines on October 21 and reported its action to the full board the following day. In early November, Lance contacted his counterpart at PCS to call attention to the much higher severance benefit costs that would be entailed by a 1997 closing. Shortly thereafter, PCS told Lance it thought the severance packages should be limited to three times cash compensation, but Lance said that was inconsistent with both his understanding of the terms reached and the language of the employment agreements.

The agreements also contained a provision requiring Arcadian to obtain an assumption agreement from any "direct or indirect" successor agreeing "to expressly assume and agree to perform, by a written agreement in form and substance satisfactory to Executive, all of the obligations of the Company [Arcadian] under this Agreement." Failure by Arcadian to obtain such an agreement from a successor automatically triggered the golden parachutes upon a change in control. PCS and Arcadian filed a Joint Proxy Statement with the SEC on January 28, 1997, laying out the severance formula, including incentive payments, lump-sum pension benefits, and the tax gross-up feature whereby the company increased the golden parachutes to cover related taxes.

PCS continued to resist Arcadian's inclusion of long-term incentives in the formula. Plaintiffs' counsel thus recommended that plaintiffs engage Arthur Anderson to produce a report justifying plaintiffs' interpretation of the golden parachutes, to defend against...