Key Takeaways

  • A business separation agreement defines how departing owners or employees will exit the business and outlines financial, operational, and legal responsibilities.
  • Common components include severance, release of claims, non-compete clauses, and the right to consult counsel.
  • Additional provisions often address asset division, debt responsibility, intellectual property rights, and transition support.
  • Agreements must comply with applicable state and federal laws to be enforceable.
  • Having a clear and customized agreement helps avoid future legal disputes and facilitates a smooth business transition.

A corporate separation agreement is written when an employee leaves a company, whether they do so voluntarily or involuntarily. Certain terms and conditions should be included in the separation agreement to protect the company against potential legal proceedings, disparagement, or other legal issues that might arise if the employee is part of a protected class.

Terms of Agreement

Most corporate separation agreements have boilerplate language, particularly if the employee leaves voluntarily. However, for employees who are involuntarily terminated, the language might change depending on the reasons why the employee was terminated. Regardless, certain key provisions should be included in any separation agreement.

Included in the agreement are the following:

  • The reason for termination.
  • The terms of severance.
  • Release of claims.
  • Right of employee to consult a lawyer.
  • Non-compete clauses.
  • Applicable laws and enforceability of the agreement.

Ownership and Asset Allocation

Clearly defining ownership rights is critical in any business separation agreement. This section should address:

  • Which party retains ownership of physical and intangible assets (e.g., equipment, real estate, trademarks).
  • The transfer of shares, ownership interests, or voting rights.
  • A valuation method for dividing shared property or dissolving joint ventures.
  • Procedures for buying out a departing partner’s stake, including timelines and payment terms.

Ensuring both parties agree to the asset distribution terms can prevent future disputes over company property or financial equity.

Reason for Termination

The reason for termination is going to be the cause for termination. Perhaps the employee wasn’t performing well or had several issues regarding his behavior. Whatever the case may be, this initial section will indicate the reasoning for termination.

Transition Planning and Responsibilities

A business separation agreement should include a transition plan outlining the roles of each party post-separation. This may involve:

  • Ongoing support obligations, such as knowledge transfer or training.
  • Notification requirements to clients, vendors, and stakeholders.
  • Handling of business licenses, permits, or registrations.
  • Continued access to systems or documents during a defined transition period.

A structured transition reduces operational disruption and protects client and partner relationships.

Terms of Severance

The terms of severance and release of claims are perhaps the most important aspects of the separation agreement, as the terms will specify the amount of severance pay that the employer is giving to the employee. The severance will be a specified amount; however, many employers offer a severance based on a certain number of months.

For example, an employer might offer a severance pay equivalent to six months of pay for the employee. During this time, the employee will continue to receive his salary and benefits as if he was still employed by the company but will not actually be working for the business. After the six-month period, he will stop receiving such benefits and salary from the company.

Confidentiality and Trade Secrets

To protect the company’s competitive position, the agreement should include clauses addressing:

  • Non-disclosure of sensitive company information, including financials, customer lists, and proprietary data.
  • Duration and scope of confidentiality obligations.
  • Remedies for breach of confidentiality, including injunctive relief or damages.

These provisions are especially important when a key executive, founding member, or employee with access to trade secrets is exiting.

Release of Claims

The release of claims is simply a promise that the employee releases all legal claims against the employer that are currently pending. For example, assuming the employee currently has a legal suit against his employer for any reason, the release of claims clause in the separation agreement can indicate that the employee is releasing the employer of its liability, and therefore, the employee is agreeing that he will not bring a lawsuit against the employer for such reasons.

Mutual Indemnification

Mutual indemnification provisions protect both parties from liabilities arising from the actions of the other after separation. These may include:

  • Indemnification for debts, taxes, or lawsuits arising from prior acts.
  • Carve-outs for willful misconduct or gross negligence.
  • A clear timeframe during which claims may be brought.

Mutual indemnification adds legal protection and helps both parties move forward without undue risk.

The Right to Consult an Attorney

Not that this is different from the employee having a right to consult an attorney due to the actual reasoning for termination. If the employee feels as though he was wrongfully terminated, he can, in fact, consult an attorney to see if the termination was legally justified. If not, the employee can bring a legal suit for wrongful termination.

Governing Documents and Preexisting Agreements

The business separation agreement should clarify its relationship to existing governing documents, such as:

  • The company’s operating agreement, bylaws, or shareholder agreement.
  • Partnership agreements or prior employment contracts.
  • Any conflicting terms should be resolved or waived in writing within the separation agreement.

Referencing and reconciling prior agreements ensures legal clarity and minimizes contract disputes.

Non-Compete Clauses

Non-compete clauses are also very popular in separation agreements. Such language will generally indicate that the employee cannot work for another competitor located within a certain geographical area for a specified period of time. An example of this would be an employer that operates as a technology company preventing any employees who leave to work for any one of its competitors located within a 15-mile radius of the employer’s offices for a period of six months to one year. Most confidentiality clauses are justified and appropriate; however, a confidentiality clause might be held invalid if it is so unfair in its terms that it would prevent employees from gaining employment after leaving the company.

Intellectual Property and Branding Rights

Address ownership and use of intellectual property assets, including:

  • Trademarks, logos, patents, and copyrights.
  • Rights to use company branding post-separation.
  • Obligations to transfer or assign IP ownership.
  • Non-infringement and licensing terms, if any rights are shared or retained.

This is essential when a business partner or co-founder played a key role in developing brand identity or proprietary products.

Applicable Law and Enforceability

The separation agreement will also include language regarding the applicable law and enforceability of the contract. Since the separation agreement might not include the element of consideration, the contract itself should include language specifying that the employee has read all terms and provisions identified in the agreement and understands his rights and obligations under the law. Furthermore, by signing the agreement, the employee has now consented to the terms, and any actions taken by the employee that contradict what is stated or required under the contract could be considered a breach.

Other clauses that can be beneficial to include in the separation agreement are references, return of company property, and rehiring provisions. This is especially important for the employee, as he will likely ask the company to provide some sort of positive reference when looking for a new job. Moreover, the return of company property is usually done after the employee is terminated or has resigned. You’ll want to ensure that you protect your company’s assets by having the employee return the property as soon as possible.

Dispute Resolution Process

To manage disagreements efficiently, include a clear process for dispute resolution:

  • Choice of mediation, arbitration, or litigation.
  • Jurisdiction and venue for any legal proceedings.
  • Responsibility for legal fees and court costs.

Alternative dispute resolution methods like mediation can save time and reduce legal expenses for both parties.

Frequently Asked Questions

  1. What is a business separation agreement?
    A business separation agreement outlines the terms under which a business owner, partner, or employee exits a company. It addresses financial obligations, rights, and responsibilities post-departure.
  2. Is a business separation agreement legally binding?
    Yes, if it is properly drafted, signed by all parties, and compliant with applicable laws, it is legally enforceable.
  3. What should be included in a business separation agreement?
    It should include severance terms, asset division, release of claims, non-compete clauses, confidentiality, and a dispute resolution method.
  4. Can a separation agreement override prior contracts?
    It can clarify or amend prior agreements, but it must do so explicitly. Conflicts should be resolved within the agreement’s language.
  5. Why is confidentiality important in a separation agreement?
    It protects trade secrets, client information, and sensitive business data, especially if the departing party had access to proprietary assets.

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