Change Control Agreement

Change of control agreements, sometimes referred to as “golden parachutes,” pay executives for job losses due to mergers or sales. Officers are trustees responsible for taking action in the best interests of the Company and shareholders. However, CEOs face inherent difficulties when it comes to a merger or sale of the company, the end result of which causes the executive to lose its position. Change of control agreements are structured in such a way as to encourage managers to seek and pursue sale or merger opportunities where it is in the best interests of shareholders, without having reservations about the loss of their own positions. Why should it be recorded in writing? “The usual reason boards of directors include change of control provisions is not to distract the executive from concerns, to worry about whether the company will be acquired, and to keep it objective and neutral,” says Michael Sirkin, head of the executive compensation practice at Proskauer Rose LLP. Golden Parachute payments are triggered in one of three ways, and each is triggered by specifically identified control changes. There is the “single trigger”, in which the manager voluntarily resigns in peace and demands payment. The only trigger favours the manager because of the automatic nature of the change in the definition of control, i.e. he is financially secure. The manager cares less about the future of the company after a change of control, and depending on the language of the contract, the manager can be hired again the next day. Many agreements do not allow assignment; however, this does not apply to a change of control. Ultimately, a company must determine the circumstances in which it does not want to continue the agreement in the form originally negotiated and designed.

A party may attempt to ensure that the other party obtains consent to make the change and maintain the agreement, or make some form of payment as compensation for the change while retaining the right to terminate the agreement. In addition to termination, a party may request repayment of certain investments made under the agreement because the change of control poses a significant threat to its business. The “double trigger” is more frequent and favors the company. This trigger requires an immediate or valid reason on the part of the manager and a defined payment period of one year usually. Unlike the individual trigger, the executive cannot resign voluntarily. Its participation in the existing and future business is required by the agreement. However, the executive still receives a lot of protection during the change of control. The company will clearly have the desire to maintain the loyalty and commitment of the leader and will reward the leader even after the change of control.

Such an outcome is attractive for maintaining continuity and retention of leaders in key positions. For example, a company may change suppliers or subcontract to new parties, which may result in a change in the details, quality or timing of obligations under the agreement, or a competitor may acquire one of your suppliers and you may no longer want to do business with that supplier. The following wording is an example of a two-trigger change of control: If a company is funded by venture capital, it may be important to include a change of control provision so that, if the lender does not see the desired growth, it has the option to sell by merger or sale. As with all contractual transactions, actual written provisions apply. Here is an example of changing the definition of the control: In Buckhorn, Inc. Against Ropak Corp, the court ruled that a double trigger change in the control payment was valid because “the court considers that this provision adequately promotes the interest of shareholders in retaining senior executives in key positions during a critical transition period. without over-anchoring management or overwhelming Ropak. 656 F.Supp.

209, at *232 to *233. However, the court declared invalid the provision adopted by the board of directors on the change of control with a single trigger, as it was not an appropriate response to a threat of takeover. There are different opinions on the impact of these agreements on the objectivity of the executive. Change of control agreements typically motivate the executive to act in the best interests of shareholders by eliminating the distraction from the post-control uncertainties that the executive faces with respect to his or her compensation. See Fenoglio v. Augat, Inc. 254 F3d 368 (1st Cir.2001). If the executive is satisfied that its change of control agreement will result in a significant payment for the golden parachute and a payment planned to account for excise duties, its personal interests will be more closely aligned with those of the shareholders. However, the reasons for using change of control regulations vary from organization to organization. They are sometimes used to attract turnaround talent to smaller, struggling companies. However, in today`s active M&A environment, large companies are realizing that the stability they were once able to offer may not be as strong as they would like. Therefore, they must make arrangements for management in the event of a change of control.

It is not only a question of how much the manager is remunerated, but also how that remuneration is paid. The decisions taken will have a significant impact on future tax issues. For example, under Section 280G of the IRC, target companies cannot deduct change of control payments from taxable income if three conditions are met: first, if there is a change in control or ownership; second, if the payment is made to a “disqualified person” who, as defined by the IRS, is an employee or independent contractor who owns shares whose fair market value exceeds 1% of the fair market value of the outstanding shares of the corporation. Third, the total remuneration for the change of control must be or exceed the basic salary of the disqualified person by a factor of three. If these three conditions are met, executives will be subject to a 20% excise tax on all payments in excess of their base salary. .