Employee Change of Control Agreement
Employee Change of Control Agreement
For the employer, an agreement on a change of control also encourages senior managers to remain loyal to the company in times of uncertainty and vulnerability. An agreement on a change of control is usually found in the written employment contracts of senior managers because of the unique role these executives play within the company, including their roles in strategic planning. Often, these employees are directly involved in the sale or transfer of the business, which is considered by an agreement on a change of control. A CEO or CFO will be more directly affected by a change in control of a company than other employees. To gain the upper hand today in the change of control negotiations, Gourley says, “You`d better be hot!” When reviewing similar provisions, the manager and his or her advisor should carefully consider each word and its use in the agreement. Slight language changes can have a huge and sometimes costly impact on the leader. Remember that the terms define the “intent” of the parties. If a particular clause is not included in the agreement, it will not be applied. If the controversial term is somehow incorporated into the agreement, the executive or company will have a hard time removing the term once a dispute arises. 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.
In Buckhorn, Inc.c. Ropak Corp, the court held 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 unduly anchoring management or overburdening 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. (iii) for thirty (30) months after the date of termination (the “Continuation Period”), the Employer shall, at its own expense, continue, on behalf of the Executive and its dependents and beneficiaries, the medical, dental, disability and hospitalization benefits provided to management at any time during the 90-day period preceding the change of control or at a later date (and if various benefits have been paid during this period); such departments elected by the Board of Directors) or (B) to other officers in a similar situation who continue to serve the Company during the Continuance Period. The coverage and benefits (including deductibles and costs) provided for in this Section 3(b)(iii) during the Continuance Period shall not be less favourable to the Executive and its dependants and beneficiaries than the most favourable of such coverages and benefits during any of the periods set out in clauses (A) and (B) above. The employer`s obligation under this Agreement with respect to the above benefits will be affected to the extent that the Manager receives such benefits under a subsequent employer`s benefit plans, in which case the Employer may reduce the coverage of all benefits that it is required to provide to the Manager under this Agreement, as long as the combined coverages and benefits of the combined executive benefit plans are not less favourable than the coverages and benefits. shall be made available under this Agreement. This subsection (iii) shall not be construed as limiting the benefits to which the Manager, his or her dependents or beneficiaries are entitled under the Company`s plans, programs or benefit practices after the end of the Company`s employment relationship, including, but not limited to, medical benefits and retiree life insurance; The following wording is an example of a double trigger in the control provision: it is not only the amount of the manager`s remuneration, 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 are subject to a 20% excise tax on all payments in excess of their base salary. (For more details on this provision, see www.irs.gov.) A recent case in Ontario highlights the importance of a well-drafted change of control agreement. In Fisher v. First Uranium Corporation, the plaintiff (a former employee) asserted that certain changes in the composition of the company`s board of directors constituted a change of control sufficient to trigger the change of control agreement so that he could leave the company with his lump sum payment. The agreement provided, among other things, that a change of control would take place in the event that “the incumbent directors cease to represent the majority of the members of the board of directors.” Although both parties agreed that the board of directors had undergone changes, they did not agree that the composition had changed so that the incumbent directors were no longer in the majority. After a thorough analysis, the Ontario Superior Court concluded that the applicant`s position was not supported by the evidence. Regardless of the size of a company, managers can be victims of dual liability and relocations or downgrades when a company is merged or acquired – totally unfavorable results. .