Protecting Employees Amid M&A Uncertainty August 19, 2019

Ann-Marie Ahern

Change in Control agreements are useful tools in managing workforce engagement 

Change in Control, (CIC), agreements have become a common feature of management-level compensation packages. In an era of increasing consolidation and private equity involvement, a potential for merger, acquisition or sale is a huge area of concern for employees. If key employees know the company is positioning for sale, how do you keep them fully engaged and committed, especially when such a transaction might result in their own job loss? How do you prevent the high-level employee from losing objectivity about a potential sale when closing the deal will likely result in unemployment? To retain top talent in an environment of M&A uncertainty, HR leaders often turn to CIC agreements.

CIC agreements, generally speaking, provide that a designated employee will receive a set amount of compensation upon the occurrence of certain contractually defined events. Typically, CIC agreements are either “single trigger,” meaning that the payout occurs upon the sale of the business or a change in control, or “double trigger,” meaning that the benefit pays upon the sale or change in control, plus a job loss or material reduction in role or responsibilities within a certain time thereafter.

If, however, the employee is permitted the opportunity to remain employed by the surviving entity, in a double trigger agreement, the CIC benefits are not paid. Increasingly, modern CIC agreements are double trigger.

Benefits under a CIC agreement often take the form of a severance payment that is in excess of standard company policy. CIC benefits are typically expressed in terms of a multiple of base salary — the more essential the executive is to a consummating sale, the higher the multiple. It is not uncommon for bonus and fringe benefits to be paid for a like period of time.

In addition to or in lieu of severance pay, CIC agreements may involve accelerated vesting of equity that pays upon sale. This is an important consideration for those who have long-term incentive plans that involve multiyear vesting cliffs. Accelerated vesting of all unvested units can be of tremendous value and may allow an employee to realize the value of grants that would otherwise be subject to forfeiture upon separation from employment.

CIC agreements vary widely and should be tailored to create a true win-win for the company and for the executive in whom the employer hopes to inspire loyalty.

ann-marie ahern headshotAnn-Marie Ahern is principal with McCarthy, Lebit, Crystal & Liffman Co. LPA. Contact her at 216-696-1422.

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