| Small & micro cap project / Activism insight
Teaming up with a former CEO: A case study of the problematic covenant in a separation agreement
At times, former executives file 13Ds and agitate for change. We recently wrote about the proxy campaign launched by the former executive of MiMedex and explained why it failed.
It is about the proxy campaign launched by a group of investors who tried to acquire the company and teamed up with the company’s former CEO.
In July 2019 and August 2019, SKK proposed the acquisition of the company, but the company’s board refused to engage with SKK on both occasions.
In November 2019, SKK entered into an agreement with Mr. Nynens. As per the agreement, upon the consummation of the acquisition by an SKK-controlled entity of up to 100% of the outstanding capital stock, SKK agreed to appoint Nynens as executive chairman, with an annual base salary of $250,000 for a minimum term of three (3) years. In December 2019, SKK again offered to acquire the company, which was again rejected by the Board.
At the end of December 2019, the investor group nominated four candidates to the board of the company.
In February 2020, the company filed a lawsuit alleging that Mr. Nynens had breached the separation agreement entered into between the company and Mr. Nynens. Also, the lawsuit argued that the remaining activist group members induced Mr. Nynens to commit these breaches.
So, what went wrong?
The problem was with the separation agreement entered into by the company and Mr. Nynens in May 2018.
When Mr. Nynens resigned from the company as CEO in May 2018, he entered into a separation agreement, which had a peculiar restrictive covenant to not seek future employment with the company.
Since SKK and Nynens entered into a legal agreement to become “executive chairman”, it is clear that he is seeking employment at the company, which violates the terms of the separation agreement.
The activist group entered into a settlement and sold all the shares in the company.
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