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Executive Agreements: Change of Control (aka Golden Parachute)

Greg McAllister

Executive agreements often include Change of Control (COC) provisions that are triggered by some material event in the company, often new ownership. IMcP’s employment attorneys have extensive experience drafting and litigating change of control agreements.

Change of control agreements are intended to provide levels of protection for a company’s current executives when the company is about to be acquired or undergo some other significant change of control. That protection is important because new owners that are soon-to-be-in-charge may have different missions and goals – and possible plans to replace the original executives that helped build the company.

If an executive does such great work that the company is successful and targeted for acquisition, should that executive be terminated without reward? Should that executive be worried about being replaced and thus feel pressure to leave for a new job before an acquisition can be finalized? Such a scenario is not beneficial to the company either because any potential suitor for the company would likely want some of the executive team in place – at least for a while. The change of control lays the ground for protection and reward – often referred to as a “golden parachute.”

Triggering a change of control is defined, unique, and varies based on factors, such as the company’s size, whether it is private or public, time since initial incorporation or reorganization, and other matters. Examples of triggering events are countless but some are: (a) acquisition by any a person or entity of a threshold percentage of common stock or combined voting power; (b) individuals on the board (an “incumbent board”) cease to be a majority of a board of directors; (c) certain reorganizations, mergers, consolidations, or sales of company assets; and (d) stockholder approval to liquidate or dissolve. Each of those events would include additional specific modifications.

A critical issue with a change in control is to determine whether there is one trigger or two triggers. Under a single trigger, which is now more uncommon, only one event would need to occur for the executive to receive the reward (perhaps cash payments, vested stock, new contract, or other incentives).  Obviously, in negotiating an employment agreement, a single trigger is very executive friendly.

Most COCs include a second trigger. Under that situation, the first trigger may be that a company is acquired by a purchaser. After that event occurs, perhaps nothing changes to invoke the change of control contractual provision for the executive. Instead, there must later be a second trigger. For example, the second trigger could be that the executive (a) is terminated by the purchaser without a defined “Cause” or (b) is demoted in title or duties or (c) resigns for a defined “Good Reason.” Good Reason often includes breach of contract by the acquirer; diminution of the executive’s title, duties, or compensation; cease of operations; or other provisions such as relocation (those reasons to resign may be subject to a temporal cure provision). Usually, the second trigger would have to occur within a certain time period after the first trigger.

Some COCs will also define a “potential change in control.” Such a potential COC may be based on the (a) the company entering into an agreement that, if completed, would constitute in a COC; (b) public announcement of an intention to take actions that would later be a COC; (c) threshold percentage changes in voting powers (or combined voting powers); or (d) certain board of director resolutions. Such a “potential change in control” would also likely be tied to a “potential change in control period” based on certain time periods, such as a certain number of months or a determination by the company’s board of directors.

IMcP’s employment lawyers litigate change of control disputes. Those disputes involved whether, when, or how a change of control occurred, and the resulting damages. There are many strategic decisions to make in the course of such litigation. That starts before any lawsuit is filed. The pre-suit work involves closely reviewing the contract (and usually related contracts) and analysis regarding a potential suit’s jurisdiction, venue, potential for arbitration, governing law, and related provisions.

A related provision that is usually at issue is an attorney fee-shifting provision. Most COCs require the company to pay the executive’s legal fees in a lawsuit about a COC. Companies sometimes dispute fee-shifting based on the level of specificity regarding that fee-shifting provision, and those certainly vary from contract to contract. That analysis is part of both the pre-suit analysis and strategy during litigation. The strategy during litigation requires careful analysis regarding discovery, such as the document requests and potential deponents, which sets the stage for pre-trial and trial.

The employment lawyers at IMcP’s have the experience and decision-making necessary in any negotiation and litigation regarding change of control agreements.

FOOTNOTE: IMcP’s employment lawyers have been asked, and asked each other, “Is there a difference between ‘Change of Control’ vs ‘Change in Control’?” IMcP lawyers have seen both CIC and COC used without any distinction between the two, and searching EDGAR has not shown us anything to suggest otherwise. If anyone has that answer, please call McAllister so he can stop looking.

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