By Robert A. Adelson, Esq.
Is your company “in play”? Are you a C-suite officer or a VP or director or other senior executive, and you have heard the rumors or perhaps even seen the company memos that the company is being shopped and may soon be facing an acquisition? How do you protect your job or even advance your position in the event of a “successful” acquisition and change in control of your company?
Dilemmas You May Face
Will you lose your position on a change of control? Suppose you are a COO, CMO, CSO, VP of Sales or Director of Information Technology, there may well be a redundancy and the staff of the acquired company expendable, and as a result you might face loss of your position in this change of control. At a minimum, you will have a new CEO, new executive suite, and new reporting structure where you will have to earn your wings and prove your worth, yet again. Furthermore, there is still a possibility that in time, the new control structure may seek “administrative efficiencies” and your early exit from the company.
On the other hand, you may have important knowledge, contacts, and relationships that form a key part of the assets being acquired. Will you be fairly compensated for all that you are expected to bring to the prospective employer?
Very often in a change of control, senior management is focused on the day to day, doing what is right for the company, keeping up with the rapid pace of the acquisition, and so on, while their own personal needs are not properly addressed.
Assess Your Importance to the Deal
When a C-suite or senior executive is faced with a change of control, it is wise to prepare early. Early on in an acquisition process, when your company is in play, you should carefully assess your value to the ongoing and future enterprise and negotiate for assurance and protection in an executive retention agreement. You should not push this further into the future or leave this to the last minute, because last minute often results in “take it or leave it.”
In negotiating the terms of your retention, you should certainly raise the need to recognize past contributions you have made to the enterprise, but more importantly, how your retention could be crucial to the success of any acquisition. If the future owners are to achieve the value sought in an acquisition, then key executives essential to the value of the enterprise need to stay in place.
During the negotiation process, you should also test the waters for other job opportunities, and indicate to the owners that your early departure is possible if a proper retention package is not offered.
What is the Proper Retention Package?
You should negotiate for an executive retention package that reflects both past contributions and the importance you hold to ongoing operations.
In my practice, I have had cases where only 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, markets and personnel. Should the executive quit his/her job or did not continue after the acquisition, the value of the enterprise might be reduced by 50% or more. Yet, the executive’s share of the company at sale was less than 1%. When I took up the representation, the owners did not want 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, they finally agreed to a huge increase to the executive’s share.
The right retention package should have these important elements
- Proper amount of 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
- 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.
Protect Your Interests with a Change of Control Agreement
If you have worked hard to make your company successful, you need to assure proper recognition and protection. Perhaps along the way, you made key contributions, or you had to weather hard years, and you and your family may have made sacrifices. Now, there is a prospect that your hard work, contributions and sacrifices may finally pay off for the company in a “success event,” that is, an acquisition and liquidity event for the company’s owners. When that happens, you too deserve a fair share in that success event. In addition, you deserve protection in the new regime that will follow. It is best to seek the counsel of an experienced executive employment attorney, early in this process, to obtain your share of success and those protections in a negotiated change of control / retention agreement that reflects your own interest and needs.