info@ceoworld.biz
Thursday, March 28, 2024
CEOWORLD magazine - Latest - Education and Career - Change of control agreements – a quick guide for CEOs, CFOs, and other senior executives

Education and Career

Change of control agreements – a quick guide for CEOs, CFOs, and other senior executives

C-Suite and Key executives need proper retention agreements when your company is “in play” and an acquisition looms ahead

You are a C-suite officer or senior executive and your company is facing an acquisition. How do you protect yourself or even advance your position in the event of a “successful” acquisition and change in control of your company?

DILEMMA FACED WHEN YOUR COMPANY IS “IN PLAY”

You could be a CTO, or a CMO, or COO, VP Sales, Marketing or Information Technology and perhaps you will face loss of your position in this change of control. At the least you will have a new CEO, new executive suite, and new reporting structure, where you will have to “earn your wings” – prove your worth, yet again. You may face a circumstance where the new control structure seeks “administrative efficiencies” and your early exit from the successor entity.

On the other hand, you may have important knowledge, important contacts, important relationships that form a key part of the assets being acquired. Will you be fairly compensated for all that you are asked to bring to the new owner?

Very often in a change of control, senior management is focused on the day to day, and doing what is right for the company, and keeping up with the rapid pace of the acquisition, and … personal needs are not properly addressed.

SELF-ASSESSMENT – YOUR IMPORTANCE TO THE DEAL

Early on in and acquisition process, when a company is in play, the C-suite or senior executive ought to carefully assess his or her own value to the ongoing and future enterprise and seek both assurance and protection in a negotiated retention agreement.

This is not something to leave to the last minute or to allow to be pushed off into the future. All to often, last minute translates to “take it or leave it”

In such a negotiation, the executive should certainly raise the need to recognize past contributions made to the enterprise, but more important how the executive’s retention could be critical to the success of any acquisition. If the owners are to achieve the value sought in an acquisition, then key executives critical to the value of the enterprise need to stay in place.

As part of such a negotiation, the executive should “test the waters” for other opportunities, and indicate that early departure is possible if a proper retention package is not offered.

WHAT IS THE PROPER RETENTION PACKAGE?

The right package should reflect both past contributions and the importance the executive holds to ongoing operations.

I have had negotiations, where, on occasion, one or two executives were critical to the success of the acquisition. In one case, over 90% of the critical work force reported to one executive, who always put company first, ahead of his own needs.   This executive was critical to the company’s key technology and markets as well as personnel. If that executive left or did not continue after the acquisition, it might reduce the value of the enterprise by 50% or more. Yet, in that case, before I took up the representation, the executive’s share of the company at sale was less than 1%. The owners hated to increase the executive’s share of the sale, but faced with either a negotiated retention agreement or the risk of departure, and thus, the possible loss of the sale or dramatic reduction in the sale price, the executive’s share was increased…dramatically.

Clearly, the right package should have certain important elements

  • Significant equity of the target company to the executive,
  • Liquidity for the executive on the levels of liquidity offered owners
  • Properly structured equity, tax favored for capital gain taxation
  • Proper severance in the event of early termination after the acquisition
  • The ability to trigger severance if the executive’s position or responsibilities are reduced
  • Proper structuring to avoid potential excise tax for parachute payments under IRC §280G.

CHANGE OF CONTROL AGREEMENT TO PROTECT YOUR INTERESTS

In close, if you have worked hard to make your company successful, you need to consider proper recognition and protection. Perhaps you had to weather hard years. Perhaps you and your family made sacrifices. Perhaps you made key contributions along the way. Now, there is a prospect that your hard work, sacrifices and contributions may at last pay off for the company – result in a “success event” – an acquisition and liquidity event for the company’s owners. If that is the case, you too deserve a fair share in that liquidity event. You also deserve protection in the new regime that will follow. It is best, early in this process, to seek that share and those protections in a negotiated change of control / retention agreement that reflects your own interest and needs.

**************

By Robert A. Adelson, Esq. is a corporate and tax attorney and partner in the Boston, MA law firm Engel & Shultz LLP.   He represents C-suite and senior executives in employment, equity, severance and change of control agreements.


Add CEOWORLD magazine to your Google News feed.
Follow CEOWORLD magazine headlines on: Google News, LinkedIn, Twitter, and Facebook.

This report/news/ranking/statistics has been prepared only for general guidance on matters of interest and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, CEOWORLD magazine does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.


Copyright 2024 The CEOWORLD magazine. All rights reserved. This material (and any extract from it) must not be copied, redistributed or placed on any website, without CEOWORLD magazine' prior written consent. For media queries, please contact: info@ceoworld.biz
SUBSCRIBE NEWSLETTER
CEOWORLD magazine - Latest - Education and Career - Change of control agreements – a quick guide for CEOs, CFOs, and other senior executives
Robert A. Adelson, Esq.
Robert A. Adelson, Esq. is a corporate and tax attorney and principal of Adelson & Associates, LLC, Boston, Massachusetts. He represents CEOs and C-Level executives on various issues including employment terms, tax-favored equity, bonus and LTI compensation, change of control, retention, separation, wrongful termination, noncompete and restrictive covenants.

Robert Adelson is an opinion columnist for the CEOWORLD magazine. Follow him on Twitter or connect on LinkedIn.