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Spirit Aerosystems and former president to go to trial over $30M retirement agreement

By Wayne D. Garris Jr., J.D.

Spirit claimed the president violated his retirement agreement through his involvement in another company’s proxy battle.

A federal district court in Kansas denied cross-motions for summary judgment from Spirit Aerosystems and its former president and CEO on the president’s breach of contract claim against the company. After retiring from Spirit, the president worked as a consultant for a hedge fund that was seeking to take over Arconic, Inc., another company in the aerospace industry. Spirit terminated his retirement agreement, arguing that the president violated it by working with another company in the “Business” while he was still subject to a noncompete agreement. The court found that genuine issues of fact existed as to the nature of Arconic’s work, whether Arconic was a competitor of Spirit, and the nature and extent of the president’s work for the hedge fund and Arconic (Lawson v. Spirit Aerosystems, Inc., April 16, 2021, Melgren, E.).

The “Business.” The former president and CEO’s employment with Spirit was governed by an employment agreement, which stated that the president could not “directly or indirectly own, manage, operate, control, be employed by, serve as an officer or director of, solicit sales for, invest in, participate in, advise, consult with, or be connected with the ownership, management, operation, or control of any business that is engaged, in whole or in part, in the Business, or any business that is competitive with the Business or any portion thereof, except for our exclusive benefit.”

The employment agreement defined “Business” as the “manufacture, fabrication, maintenance, repair, overhaul, and modification of aerostructures and aircraft components,” the marketing and selling of its products and services, and “any other businesses in which Spirit may in the future engage, by acquisition or otherwise.”

Retirement. In 2016, the president left his position with Spirit. Prior to his separation, he entered into retirement, consulting, and general release agreements with Spirit. The retirement agreement incorporated the noncompete and nonsolicitation provisions of the employment agreement for an additional two years.

Proxy battle. Shortly after the president’s retirement, a hedge fund recruited him to assist in a proxy battle to reorganize Arconic, Inc., a company that manufactured lightweight parts for the aerospace and automotive industries. The hedge fund was also considering the president to become the new CEO of Arconic if the proxy war was successful.

Spirit’s CEO and board were concerned about the president’s potential relationship with the hedge fund and Arconic. The hedge fund’s counsel contacted Spirit seeking its confirmation that Arconic was not a company in the “Business,” or, if Arconic was in the business, a waiver of the president’s obligations under the retirement agreement. The hedge fund provided Spirit with a report from a consulting firm, which concluded that Arconic was not a company in the “Business” because its operations did not overlap with Spirit’s. Spirit informed the hedge fund that it believed Arconic was in the “Business” and declined to waive the president’s obligations under the retirement agreement. Spirit also declined the hedge fund’s offer to buy out the presidents noncompete.

Moving ahead. Despite Spirit’s objections, the president and hedge fund entered into a consulting agreement. They also entered into an indemnification agreement in which the hedge fund agreed to indemnify the president for the potentially lost cash payment under the retirement agreement with Spirit, as well as $59.55 per share for the approximately 406,000 unvested Spirit shares.

In January 2017, the hedge fund publicly announced the start of its proxy contest against Arconic. The president provided several services to the hedge fund including reviewing proxy materials, providing commentary on media messages, meeting with Arconic’s largest institutional investors, and participating in Arconic’s CEO search. In May 2017, the hedge fund and Arconic settled the proxy battle. The president was not selected as CEO of Arconic and in February 2018, the hedge fund terminated its consulting agreement with him. The president received approximately $32,000,000 from his engagement with the hedge fund.

Termination of retirement agreement. In February 2017, Spirit notified the president that it was terminating the retirement agreement. Spirit believed the president had violated the noncompete agreement by working with the hedge fund and it notified him that he “forfeited any continuing entitlement to payment” of the cash and shares Spirit still owed him.

The president filed suit alleging that Spirit breached the retirement agreement and “robbed” him of approximately $2,009,861 in cash and 406,814 shares of stock–worth about $29 million based on Spirit’s closing stock price on the applicable vesting dates. The parties filed cross-motions for summary judgment.

Cross motions. Spirit offered two theories in support of its motion. First, that the president failed to comply with a condition precedent in his retirement agreement by assisting the hedge fund in its proxy battle with Arconic, a company which Spirit asserted was in the “Business” as defined by the retirement agreement. Second, Spirit argued that the president’s claim failed because he suffered no damages because his agreements with the hedge fund compensated him more than the retirement agreement would have.

Genuine issues of fact. The court concluded that there were several genuine issues of fact regarding the president’s performance or willingness to perform in compliance with the contract.

The parties disputed the nature and extent of the president’s engagement with the hedge fund; whether the services he performed for the hedge fund fell within the retirement agreement’s noncompete provision; the nature and extent of his services to Arconic and whether those services violated the noncompete provision; direct or indirect services to Arconic; and whether the president’s actions after retiring from Spirit fell within the definition of “Business” as defined in the employment agreement and incorporated into the retirement agreement. Because the parties submitted conflicting evidence on these issues, the court held that factual issues precluded summary judgment on the breach of contract claim.

Spirit’s breach. The court also found multiple genuine disputes of material fact about Spirit’s breach of the contract. Spirit asserted that its actions did not constitute a breach because it terminated the contract in response to the president’s breach. Here, the parties disputed whether Arconic was engaged in a business similar to Spirit; whether Arconic was pursuing new initiatives in additive manufacturing or 3D printing and whether Arconic and was a competitive threat in that regard; whether Arconic was a competitor of Spirit; and whether Arconic’s activities and operations fell within the definition of “Business.” Again, due to conflicting evidence presented by both parties, the court held that summary judgment was not appropriate.