Musk Accused of Cheating Twitter Execs out of Severance Pay

San Francisco, CAOn March 4, former Twitter executives Parag Agrawal, Ned Segal, Vijaya Gadde and Sean Edgett filed an ERISA lawsuit against Elon Musk and X Corp. (f/k/a/ Twitter) alleging that Musk and X Corp. had failed to pay severance benefits as required by the provisions of the law and the plan documents. The four argue that they are owed a combined $128 million in severance pay.

Agrawal v. Musk is still in early stages. As of March 12, a new judge has been assigned after the initial judge recused himself due to a potential conflict of interest. The legal discovery process is likely to be quite lengthy. Ultimately, the outcome of Agrawal may turn on a question of whether the controlling law is the Employee Retirement Income Security Act (ERISA) or the common law of contracts.

Musk’s purchase of Twitter

When Musk bought Twitter in 2022, he fired Agrawal, its chief executive; Segal, its chief financial officer; Gadde, its head of legal and policy; and Edgett, its general counsel. But of course, there’s a backstory.

After Musk definitively agreed to buy Twitter for $44 billion in April 2022, the stock market declined, and Musk attempted to back out of the deal. Twitter sued Musk and eventually prevailed. In October 2022, Musk grudgingly paid the previously agreed-upon $44 billion price.

Bad blood

Musk fired the four executives very shortly after taking control. The Complaint argues that Musk acted out of spite, from a personal grudge and without legal cause because Agrawal, Segal, Gadde and Edgett played an important role in holding Musk to the initial $44 billion price.

The lawsuit claims that Musk is now attempting to cheat them out of their benefits to save himself $200 million. Musk had previously bragged to his biographer, Walter Isaacson, that he could avoid paying severance through this maneuver. His plan, reportedly, was to “hunt the executives till the day they die,” imposing trouble, delay, and expense beyond what they could afford.

The executives had clauses in their contracts stipulating that they could receive severance if Twitter was no longer a public company. Musk, however, has claimed that he fired the executives “for cause.”

The fate of the lawsuit hinges on the terms of the executives' employment contracts. These contracts, according to the plaintiffs, guaranteed them severance packages if there were a change in control. The executives previously sued Musk for legal fees they incurred while responding to investigations into the company. In October, a Delaware court ordered Musk to pay them $1.1 million to cover those expenses.

ERISA Sections 502 and 510

ERISA’s fundamental purpose – to protect the security of employees’ retirement income – makes it an essentially employee-friendly law. Courts often interpret it in that light, while also trying to balance the interests of employers.

Agrawal and the other executives advance seven causes of action, relying on the provisions of ERISA Sections 502 and 510. Section 502 of ERISA permits a participant or beneficiary to seek a civil penalty against an employer who interferes with that person’s ability to collect benefits because of the employer or administrator’s self-dealing or other violations of the law. Musk’s attempt to save himself $200 million might be seen as self-dealing. Section 510 makes it unlawful for an employer to fire, suspend or discriminate against someone for exercising any rights to which they are entitled under an employee benefits plan.

Contract law often favors employers

The common law of contracts, developed over time to protect property rights, is often interpreted in ways that favor employers. The four plaintiffs, Agrawal, Segal, Gadde and Edgett, had contracts that guaranteed them millions of dollars on the occurrence of certain events, including a change in control of the company. It is reasonable to assume that they had opportunities to negotiate the terms of these contracts with the assistance of experienced counsel. Regardless of Musk’s motives, they begin, in the minds of some observers, as somewhat less sympathetic plaintiffs than wage earners who may not have had the chance to negotiate a severance package.

Agrawal, for example, earned an annual salary of $1 million, and he had been awarded $12.5 million in stock that was scheduled to vest incrementally. He alleges that Musk fired him literally on the eve of vesting. In the event of an involuntary termination, Agrawal was entitled to a golden parachute payment of $60 million. Similarly, in the event of involuntary termination, Segal would receive $46 million and Gaddde $21 million. 

Musk and X Corp. might plausibly argue that these provisions were voided after the executives breached their fiduciary duty by not acting in the best interests of Twitter during the acquisition negotiations. They might also argue that the “for cause" provisions in the executives’ contracts allows the company to deny severance payments if the company can demonstrate a legitimate reason for firing the executives, including poor performance or strategic missteps during their tenure. It is still very early in the lawsuit and many issues can be expected to emerge as discovery proceeds.