What Is a Change of Control Agreement

(d) there is a change in the composition of the Board of Directors of the Corporation within two years, resulting in less than a majority of the directors being interim directors; According to Sirkin, there are three common types of triggers: a “single trigger” allows a leader to resign at the time of transition. A “double trigger” occurs when a manager is terminated for a specified period of time after the change of control takes effect. This, Sirkin says, is the most popular trend today. Finally, a “trigger and a half” occurs when a leader resigns after a predetermined period of time. Why write it? “The main reason boards apply change of control provisions is not to divert management`s attention from the concerns related to the acquisition of the company and keep them objective and neutral,” says Michael Sirkin, head of the executive compensation practice at Proskauer Rose LLP. In order to compensate for this excise duty, it is customary for companies to extrapolate the remuneration for the change of control of the manager. However, it can be very expensive. “At lower levels, it can be extrapolated, it can be reduced, or maybe nothing happens,” Sirkin says. “I think people are taking a closer look at change of control regulations in light of recent corporate governance divisions. They examine the economic impact of change of control provisions and what they associate with them. Other elements of remuneration that should be taken into account in the negotiations are non-binding benefits such as medication and retirement.

While “if an employee has been fired, a company can`t continue to provide them with medical benefits or retirement savings,” Gourley says, there are a few interesting points of discussion. “For example, even if the company cannot continue to promote you as an employee in its health and health insurance, you are entitled to COBRA and the company can pay the associated costs.” Once the rules of change of control and triggering are respected, the payment of the golden parachute must be determined. In 1984, Congress passed the Deficit Reduction Act as a tax penalty in response to a period of intense corporate takeover activity during which entrenched management teams used golden parachutes to maintain control. Senate Finance Comm., 98th Congress, Deficit Reduction Act 1984, Explanation of Provisions Approved by the Committee on March 21, 1984. The bill created two new sections 280G of the Internal Revenue Code, which prohibit deductions for oversail payments, and section 4999, which applied a 20% excise tax to the executive branch for oversail payments. The specific provisions of the two sections can be summarized as follows: A “parachute payment” is any payment to a “disqualified person” in the form of compensation if such payment is subject to a change of control on the part of the company and the overall present value of all such payments is equal to or greater than three times the person`s “base amount”. The basic amount is the average remuneration of the natural person included in the gross income for the five taxable years preceding the taxation year in which the change of control takes place. An “excess parachute payment” is any parachute payment that exceeds the portion of the base amount allocated to that payment. A “disqualified person” is any person who is an employee or independent contractor of a corporation and who is an officer, shareholder or highly remunerated person. A licensee should consider the impact of accepting a change of control provision, otherwise it could reduce the value of the corporation in the eyes of a potential acquirer. This is particularly important for small and medium-sized enterprises. In the event of a breach, a court will decide the dispute on the basis of evidence of what the parties intended to do before ratifying the agreement.

In the context of ERISA, the executive may also invoke legal arguments based on the fiduciary relationship; one in which the company has a fiduciary duty to pay benefits in the event of a change of control. .

Comments are closed.