Manan (Mike) Shah, a partner in Milbank LLP’s Executive Compensation Group and Corporate Governance Practice, spoke with Agenda about the recent Federal Trade Commission (FTC) proposal to ban all noncompete clauses, including those for senior executives.
In an article titled “Proposed Ban on Noncompetes Could Sway Executive Comp,” Mr. Shah said that noncompete clauses are “intended to provide the company the ability to protect its legitimate business interests.” The argument for eliminating them for rank-and-file employees is understandable, he said, because they are typically not exposed to confidential information or the fundamentals of a business, but senior executives “are the ones that can really harm your business.”
Mr. Shah believes that not having a blanket ban would be preferred by most businesses. If exemptions are adopted in the rule, however, companies will need to decide who falls under the ban. The main question directors would have to consider is where to draw the line. The answer, he said, is “you draw the line based on a bottom-up approach within your organization that says, ‘Who are the key people that, if they were to go work for a competitor, would cause harm?’”
If the FTC ban is adopted as proposed, Mr. Shah sees companies restructuring their compensation plans to prevent executives from leaving for competitors. Companies could subject executives’ vested or deferred equity to forfeiture provisions that would allow them to claw back equity if the executive leaves to work for a competitor. “There is case law that permits forfeiture because that’s a voluntary act,” he notes. “You can decide whether or not you want to go work for someone and forfeit it.” Mr. Shah expects the ban, if adopted in its current form, to see legal challenges.
Despite representing CEOs as part of his practice, Mr. Shah has “zero sympathy” for executives who claim they were harmed by noncompetes. “If you are given the keys to the house and you are privy to everything that the organization is contemplating doing or thinking about, a company should have the benefit of making sure that someone in that position is not able to harm you.”
Agenda, a Financial Times publication, is a boardroom resource with dedicated journalists that deliver independent, original analysis on the US corporate board space.
Click here to read “Proposed Ban on Noncompetes Could Sway Executive Comp” (Agenda access required)
