By: Robert T. Smith
The flurry of mergers and acquisitions deals in the banking industry over the past several years has created an active market for bankers seeking a better fit at another institution. Anyone changing jobs accepts some risk that the new position will not be as ideal as hoped. While that risk is inherent in any move, bankers and their new employers should consider a few steps to mitigate other risks accompanying the change.
It is common for banks to impose some level of restrictions on employees, typically taking the form of a confidentiality or nondisclosure agreement intended to protect the bank’s trade secrets, proprietary and customer information. It is somewhat rare in the Arkansas market to find a restriction that completely prohibits a former employee from engaging in the banking business. Most common are restrictions on management level employees impacting their ability to solicit customers and other employees for a designated period of time post-termination (typically one year).
Historically, Arkansas courts have disfavored noncompetition covenants. Under the traditional Arkansas approach, if any part of a noncompetition agreement was found to be unreasonable in length or geographic scope, then the entire agreement was unenforceable. In other words, Arkansas courts took an all-or-nothing approach. This approach changed with the enactment of Ark. Code Ann. section 4-75-101 in 2015. Under this statute, courts are now required to amend parts of a noncompetition agreement that are “unreasonable” and enforce the amended agreement rather than strike down the agreement in its entirety. This is generally referred to as the “blue-pencil” approach. The law also makes it more likely that a noncompete will be enforced by adding a presumption that a post-termination restriction of two years is presumptively reasonable.
Duties and Obligations to Current Employer
A banker, like any other employee that is considering leaving one job for another, should first consider what duties he or she owes to his/her current employer. All prior employment agreements, letters and other documents should be reviewed to assess whether any contractual restrictions exist. These could be located in a formal employment agreement, but are often found in documentation related to options and other equity grants that a banker may not recall receiving. Additionally, some restrictions are structured such that they are intended to become enforceable upon the employee’s receipt of an equity award without him or her having actually signed any document consenting to the restriction. Caution should be taken to make sure that all previous documents and agreements are reviewed.
Beyond any contract responsibility, the law separately imposes fiduciary duties on any employee serving as a corporate officer. Officers owe a duty of loyalty to their current employer meaning that any competition prior to resigning is a breach of this duty. This would include discussions with key customers and co-workers occurring prior to termination of employment. In practice, these conversations occur frequently, but bankers should understand that they may serve as the basis for a lawsuit.
Federal Reserve Action
Looking beyond the potential for claims by an ex-employer, a recent Federal Reserve action takes the issue to an even more concerning level.
Late last year the Federal Reserve named two Wyoming bank executives in a “Notice of Intent to Prohibit” – effectively attempting to bar their further participation in the banking industry. The Federal Reserve announced it was considering this lifetime ban for two Wyoming bankers — Frank Smith and Mark Kiolbasa — for taking trade secrets and recruiting clients from a former employer. The notice alleges that the two bankers engaged in unsafe or unsound practices and breached their fiduciary duties to their employer. The bankers are alleged to have conspired while they were working for Central Bank & Trust (CBT) to misappropriate CBT’s proprietary business information in a plan to acquire an ownership interest in Commercial Bancorp (CB) and subsequently take management positions at Farmers State Bank (FSB) which is a a wholly owned subsidiary of CB. The bankers are also purported to have obtained commitments from customers to move accounts to FSB while they were still employed by CBT. The bankers were sued by CBT in September of 2016, with the Court later ordering them to pay CBT a collective $2.2 million in damages for their actions.
According to the notice, the bankers had been working on their plan, which included the transfer of customer accounts from Central to Farmers, since at least 2013. The Federal Reserve estimates that the misappropriation of information caused more than $1 million in financial damages to CBT.
The enforcement action is currently pending. While we see no indication that the Federal Reserve is paying any closer attention to bankers moving to other institutions, bankers should be careful to ensure that they are not breaching any legal duties in preparing to change jobs.
Pointers for Bankers and their New Employers
Given this action by the Federal Reserve, and the risk of litigation by a former employer, bankers and their new employers should tread carefully through the recruitment and transition process. The risk of a lifetime ban may better protect banks, but creates new risks at the same time. If not careful, the same bank that threatens to report a former employee to the regulators may also be hiring a new employee that has engaged in the same conduct.
For the banker, the best advice is that he or she not take anything with them to their new job other than their own personal knowledge (or often referred to as what is “in between the ears”). In particular, note that the FRS’s notice alleges that the individuals took proprietary information including forms and customer information. Bankers should also avoid any discussions with current customers or co-workers to circumvent claims that the banker has breached any duty to his/her current employer. Lastly, a banker should be sure to identify all agreements that he may be subject to imposing any type of post-employment restrictions. These may take the form of simple non-solicitation provisions to outright competitive restrictions. The problem in many cases is that a banker may not recall all restrictions. For example, non-solicitation restrictions are, in many cases, imposed under stock or option award agreements. All of these restrictions must be identified to assess the banker’s legal obligations.
For the new employer, discussions should begin early with the prospective employee to confirm legal restrictions and outline a plan for the transition. The employer should make clear to the new employee what conduct is and is not acceptable.
Robert T. Smith heads the Finance and Commercial Transactions Practice Group and serves on the firm’s Management Committee. In the banking area, Robert advises clients on merger and acquisition transactions, lending, regulatory compliance and capital raising activities. He assists clients in private equity and corporate finance matters, the offering of debt and equity securities, and counseling directors and executive officers regarding fiduciary duties and corporate governance issues.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.