The Crimson Press Curriculum Center

First Page and the Assignment Questions:
A special conference-call meeting of the compensation committee of the board of directors of Database Technologies, Inc. (DTI) was scheduled for the morning of February 23, 2007. DTI, headquartered in Sunnyvale, CA, was a leader in database-related software. The company's main products helped customers monitor, forecast, and manage data growth in enterprise resource planning (RESP) system environments.

The main agenda item for the special compensation committee meeting was discussion and possible approval of a proposed Change in Control Severance Agreement. In November 2006, a large, European-based technology company had expressed interest in acquiring DTI. Because of this inquiry, John Hoffman, DTI's chairman/CEO, had asked Alan Adamson, chair of DTI's compensation committee, to have his committee consider the implementation of a severance agreement. Mr. Adamson agreed. There was some urgency to the request because DTI management expected to receive the formal acquisition offer sometime in the first half of 2007.

After a series of discussions with Mr. Hoffman and Mr. Adamson, DTI's outside counsel drew up a proposed severance agreement. The agreement, if enacted, would provide payments under certain conditions (explained below) to a “select group of management or highly compensated employees” of DTI. Included in this select group were five executives: DTI's CEO, COO, CFO, chief technology officer (CTO), and general counsel/secretary.

The materials sent to the committee members prior to the meeting explained that the severance agreement was
. . . intended for the benefit of both the key DTI executives and the company. It would protect the executives against significant negative personal as well as financial consequences that could result from a change in control. Further, having this severance agreement in place would help to keep the executives employed and focused on shareholders' interests, rather than on their own interests. That it, it would help to ensure that the company would be able to rely upon the executives to continue in their positions without concern that they might be distracted by the personal uncertainties and risks created by the possibility that they might lose their jobs.

Under the terms of the severance agreement, the named executives would be entitled to receive benefits if the executive received a Qualifying Termination following a Change in Control of the company. Change in Control was deemed to have occurred as of the first day that 40 percent or more of the then-outstanding voting securities changed hands. A Qualifying Termination was deemed to have occurred if any one or more of the following events occurred within a 24 calendar month period following the date of a Change in Control:

1.   An involuntary termination of the executive's employment for reasons other than Cause. Cause was defined as the occurrence of either or both of the following: (a) the executive's conviction for committing a felony or (b) the executive's willful engagement in misconduct that is significantly injurious to the company.

2.   A voluntary termination of the employment by the executive for Good Reason. Good Reason was defined as the occurrence, without the executive's express written consent, of any one or more of the following:

Assignment

1.   Is the proposed severance agreement in the best interest of:

a.   The executives included in it?
b.   DTI and its shareholders?
c.   A company that is acquiring DTI?

2.   Should the compensation committee approve the severance agreement as is? Should some of the elements of the agreement be modified? Or should DTI not have a severance agreement?

3.   Suppose that you, as Dennis Feingold, object strongly to at least some of the elements of the severance agreement but that the other two members of the DTI compensation recommend adopting the agreement as it is written. Would it be worthwhile for you to voice your objections forcefully and, perhaps, to take the issue to the full board of directors? Or would you consider it adequate just to cast a negative vote when the issue comes up in the compensation committee?