OPINION
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
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
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.,
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)(h) 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 addi
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 direction.
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
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 a possible challenge by PCS. The audit confirmed that the employment agreements were “well within competitive practice.” The compensation committee heard the report on February 24, but took no action. Then Arcadian’s chairman refused to hear a report to the full board, stating that it was part of PCS’s due diligence and “whatever it costs, it costs.”
Two days before the March 6, 1997 closing, Kesser demanded that PCS and PCS Nitrogen expressly assume the golden parachute severance agreements signed by plaintiffs. PCS Senior Vice President and General Counsel John Hampton refused, saying PCS was not the successor to Arcadian’s business or assets. Kesser threatened to delay closing on March 6, causing Hampton to have Barry Humphreys, PCS’s Senior Vice President for Finance, sign the assumption agreement on behalf of PCS to avoid delaying closing and incurring difficulties with merger financing. Hampton himself signed on behalf of PCS Nitrogen as its Secretary,
Prior to closing, Campbell and Williams were offered jobs at PCS Nitrogen materially different from their previous ones with Arcadian, so both terminated at closing for good cause. Hampton released Kesser from the new company’s employ at the closing. Though PCS acknowledged that it owed some amounts to Campbell, Kesser and Williams, it refused to pay even the undisputed portions of their severance packages within the allotted thirty days, thereby precipitating this suit.
II
This court reviews a district court’s grant of partial summary judgment under a de novo standard. See Wathen v. General Elec. Co.,
III
The first question we must address is whether the assumption agreement is an invalid contract on the grounds that it is a classic hold-up agreement. PCS claims that it was forced to sign under duress due to the time-sensitive financing it had arranged for the pending merger. Plaintiffs respond that the drop-dead date for the merger had been extended until April 30,
Having disposed of the duress argument, there remains a controversy over consideration. The district court, as PCS notes, gave only the most cursory attention to the question in finding that there was consideration for the assumption agreement, for the reasons stated in the executives’ brief to the court. Although we agree that there was adequate consideration to support a contract, the question deserves more careful attention. As an initial matter, we note that on appeal plaintiffs argue that closing the merger earlier than the April 30 financing deadline provided consideration. Despite representations made at oral argument, it does not appear that that argument was presented to the district court below, and we will not consider it.
One possibility for contract consideration is that the merger itself provided it. Because the executives’ employment agreements with Arcadian, which required the assumption agreement, were approved on the same day as the merger, and because Arcadian then obtained the required assumption agreement prior to closing, we are inclined to see the assumption agreement as part and parcel of the merger agreement and not as a separate agreement needing separate consideration. PCS cites case law holding that separate consideration is needed for a modification to an existing contract; however, Paragraph 8.02 of the merger agreement stated that “after approval of this Agreement by the stockholders of Arcadian and prior to the [closing], this Agreement may be amended or supplemented in writing by PCS, Merger Sub, and Arcadian with respect to any of the terms contained in this Agreement....” Under the facts of this case, we hold the assumption agreement fits within this description, is not a modification to a pre-existing contract, and is thus valid without any consideration beyond that inherent in the merger itself.
Plaintiffs argue that additional consideration exists anyway in the form of settling a bona fide dispute, avoiding delay in the merger, and averting the cost to PCS of automatically triggering the golden parachutes (of all nine Arcadian executives) upon failure to get a signed assumption agreement. Moreover, Arcadian claims it will have detrimentally relied on the validity of the assumption agreement in closing the merger if the assumption agreement is voided after the fact for lack of consideration. PCS responds that it received no benefit because appellees forebore a nonexistent right and therefore suffered no detriment. Furthermore, argues PCS, since it was not the successor, there was no bona fide dispute between it and Arcadian, and the absence of its signature on the assumption agreement would not have entitled plaintiffs to deploy their parachutes. It is possible that PCS was an indirect successor, as the sole owner of the PCS Nitrogen subsidiary, and thus the consideration admittedly sufficient for PCS Nitrogen applies equally to PCS. We decline to address these additional issues, however, because whether or not PCS was obligated to sign the assumption agreement by the terms of the employment agreement between Arcadian and the plaintiffs (i.e., whether or not the lack of PCS’s signature would have triggered the plaintiffs’ parachutes), PCS elected to sign it and its signature on the assumption agreement binds it.
Another source of consideration upon which the district court may have relied is the executives’ status as third-party bene
IV
PCS next argues that the golden parachutes violate public policy, and therefore that the assumption agreement promising them is void
PCS further argues that these golden parachutes violate public policy because they were approved after the merger had been approved, and therefore served no legitimate corporate purpose.
Mixed with its argument about public policy, PCS argues against application of the business judgment rule to this case. See Brown,
Even if we ourselves did not perceive a good rationale for these parachutes, courts should be loath to condemn a business practice simply because they do not perceive a good rationale for a given practice. Condemning poorly understood practices simply for lack of a clear rationale would substitute the court’s business judgment for the corporation’s. “If what management did was illegal, ... it should be enjoined. If it wasn’t illegal, it should be allowed even if philosophically unpalatable and, if a court cannot tell, it seems ... that this is what the business judgment rule is all about and the nod should be given to those who are vested with the business decision making responsibility.” Edelman v. Fruehauf Corp.,
In Delaware, whose law the parties agreed would govern disputes under this contract, a plaintiff must show that the majority of the board acted in a manner that “rise[s] to the level of gross negligence” before a court may second guess its business judgment. Mount Moriah Cemetery ex rel. Dun & Bradstreet Corp. v. Moritz, Civ. A. No. 11431,
The Arcadian board therefore exhibited nothing like the lack of knowledge and the swiftness of deliberation condemned in the Van Gorkom or Hanson cases. See Smith v. Van Gorkom,
V
Having upheld the district court’s partial summary judgment on the consideration and public policy issues, we turn finally to its interpretation of the multiplier clause. The district court held that the clause is unambiguous as a matter of law, but it also held that extrinsic evidence supported most aspects of the plaintiffs’ interpretation of the clause. Thus, to secure a reversal of the trial court’s factual findings based on extrinsic evidence, PCS must show that the multiplier clause in the Employment Agreements plainly excludes long-term incentives when it refers to “all bonus, profit sharing and other incentive payments,” and that the district court therefore committed clear error.
PCS first argues for application of the ejusdem generis rule of construction so that “other incentive payments” would mean payments that are like bonuses and profit sharing in being short-term incentives. Moreover, PCS adds, there would be no reason to mention bonuses and profit sharing if all incentives were encompassed by the word all, because bonuses and profit sharing payments would be included already. PCS also notes that the multiplier provides for payment of the
PCS also argues that the terms of the employment agreement should be construed against Kesser as one of the document’s drafters, and that it should be construed narrowly due to offending public policy. But PCS took part in the drafting too and the parachutes do not violate public policy, so these arguments are unavailing.
At the bench trial concerning the interpretation of the multiplier clause, plaintiffs presented the testimony of three members of the Arcadian board who said they understood the multiplier to include all incentives, including long-term ones, ESOPs and SERPs. Kesser likewise testified that long-term incentives, including ESOPs and SERPs, were included. Plaintiffs also showed that Arcadian had provided PCS with drafts during the Labor Day weekend negotiations and a mid-September spreadsheet to PCS’s outside benefits consultant that included such long-term incentives. Aside from the language of the multiplier and the drafting history, PCS built its case below on expert testimony that long-term incentives are rarely included in multiplier clauses and that when they are included, the clauses are very specific. The district court agreed with PCS that the ESOPs and SERPs were retirement benefits, not incentive payments to be included in the multiplier. However, it found that the SARs, CESARs, and stock options were incentive payments that Kesser intended to include, the Arcadian board thought were included, and the spreadsheet to PCS listed as included. Hence, it deemed them properly included in the multiplier, even though other evidence suggested that long-term incentives are rarely included in a severance multiplier. Given the evidence presented at trial, we hold that the district court’s decision to include the SARs and CESARs while excluding the ESOPs or SERPs in the “other incentive payments” is not clearly erroneous.
We further hold that the district court did not err in deciding that “in respect of’ a given year means that SARs (including individual SARs) and CESARs should count as of the year they vest. These benefits are not payments when they are distributed, but only once they vest. Though they are not cash compensation, plaintiffs argue they must be treated for tax purposes as income in the year when they become redeemable for cash. See Plaintiffs-Appellees’ Brief, at 57, citing Proposed Treas. Reg., § 1.280G-1, A-12. Arcadian treated them as such before contemplating the merger, and such treatment of these benefits is standard, according to trial testimony. But counting the incentives according to when they vested does not justify the double counting of benefits of which PCS complains. The severance agreement only calls for looking at the average of the previous two years’ “bonus, profit sharing, and other incentive payments,” so only two years of vesting should be looked at, regardless of what the vesting schedule may artificially include or exclude from that time frame.
Hence, in reconciling benefits that vest all at once with those that vest ratably over time, we hold that the multiplier clause permits, for instance, the counting of 1994 benefits that vested in 1996 on top of 1995 benefits that vested in 1996. To the extent that PCS objects to that as “double counting,” we disagree. The exec
We perceive one possible wrinkle in the counting rule just laid down. PCS objects to the inclusion of restricted stock from 1996 in the multiplier, because the company claims that those stock rights vested in 1997. The district court did not treat this problem in detail, but it appears that the vesting rule for the restricted stock may have been different than the vesting rule for the SARs and CESARs. Whereas the latter benefits vested on January 1 in the year following that in which they were granted, the restricted stock benefits appear to have vested as soon as the firm hit its performance target in the relevant year. Thus 1996 rights may have vested in 1996, even though the company could not confirm that it hit the performance targets until sometime in 1997. If the district court on remand agrees with this analysis, then the 1996 restricted stock rights that PCS argues did not vest until 1997 could and should still be included in the severance package calculations.
Other than these few corrections, we agree with the calculations as found by the district court.
VI
PCS has already received the benefit of the bargain it struck concerning golden parachutes (in having an orderly change in corporate control and in insuring Arcadian’s health in the event of a failed effort to merge), and it cannot now refuse payment in return. There was consideration for the assumption agreement insofar as it was bound up in the merger obligations. Golden parachutes are not void as against public policy, nor did the Arcadian board exhibit gross negligence in approving the golden parachutes at issue in this case. Finally, although the district court correctly interpreted the multiplier clause’s language based on extrinsic evidence gathered at trial, it committed clear error in counting certain incentive payments that were made in respect of more than two years. For these reasons, the judgment of the district court on partial summary judgment and after trial is AFFIRMED in part, REVERSED in part, and REMANDED back to the district court for further proceedings consistent with this opinion.
Notes
. This opinion will follow the district court in using the terms "employment agreements” and "severance agreements” interchangeably to refer to the executives’ agreement with Arcadian.
. Jocz modeled the first iteration of the employment agreements after golden parachutes that had been devised for another client to ward off a hostile takeover. As such, the original draft proposal included more generous parachutes that could be triggered simply by a change in control. PCS rejected that draft and suggested using the golden parachute agreements it had with its own executives as an alternative model. Jocz then adapted PCS's model to Arcadian’s needs.
. Arcadian occasionally granted non-performance-based SARs to employees as compensation. Campbell, for instance, apparently received some SARs as a kind of signing bonus when he came to Arcadian.
. There is a rich, albeit somewhat dated, secondary literature discussing the pros and cons of golden parachutes. Whatever else might be gleaned from this material, golden parachutes are not uniformly condemned as offensive to public policy. See, e.g., Kenneth Johnson, Note, Golden Parachutes and the Business Judgment Rule: Toward a Proper Standard of Review, 94 Yale L.J. 909 (1985); John C. Coffee, Jr., Shareholders Versus Managers: The Strain in the Corporate Web, 85 Mich.L.Rev. 1, 76 (1986); Ann Marie Hanrahan, Note, Koenings v. Joseph Schlitz Brewing Co.; The Wisconsin Supreme Court Addresses Executive Termination Benefits in a Golden Parachute Contract, 1987 Wis.L.Rev. 823; Richard P. Bress, Comment, Golden Parachutes: Untangling the Ripcords, 39 Stan. L.Rev. 955 (1987); Drew H. Campbell, Note, Golden Parachutes: Common Sense From the Common'Law, 51 Ohio St. L.J. 279 (1990).
. Commentators originally objected to the use of golden parachutes as anti-takeover devices where they were crafted as poison pills and triggered automatically by the single trigger of a change in corporate control. More recently, commentators have noted the potential moral hazard entailed by golden parachutes, inasmuch as they may encourage inefficient management to induce a takeover that is lucrative for departing managers. The golden parachutes here were adopted after approval of the merger, so neither of these objections can be made against them. Moreover, they required two triggering events, as termination or a role reduction had to accompany a change in control before the golden parachutes could be demanded. Thus, activation of the parachutes was within PCS's control.
. Golden parachutes have also been defended as a means of compensating managers for their investments in firm-specific skills. See Daniel R. Fischel, Organized Exchanges and the Regulation of Dual Class Common Stock, 54 U.Chi.L.Rev 119, 137-38 (1987); John C. Coffee, Jr., Shareholders Versus Managers, 85 Mich.L.Rev. at 76.