This blog post is Part 2 in the “Ready for a Sale?” series, which is aimed at getting the human resources, benefits, and executive compensation functions of your organization ready for a potential sale or similar corporate transaction. Part 1 provided general guidelines and suggestions on how to get organized and start the process. This second part will address key considerations in the process that often arise early: (1) identifying, assembling, and analyzing documents that will be automatically triggered or impacted by the potential sale, and (2) determining the expected impact of the transaction on any outstanding equity compensation.
Trust us, if your company enters a potential sale, there will be a day when all of your proactive efforts on the items below will pay off!
Once all of the definitive copies of executive compensation and employee benefit plan materials are compiled as described in Part 1, a good next step is to do a deep dive to determine what the impact of the proposed transaction will be on those arrangements and plans. Most often, triggers that may be impacted by a proposed transaction will be provisions that are impacted by, or triggered by, a “change in control,” although any particular plan or arrangement may refer to a “sale of the company,” a “liquidity event,” or a “corporate transaction,” or use similar terminology.
The most common arrangements with change in control triggers are a company’s equity plan (described in further detail below) and individual employment agreements with senior executives, but there can also be change in control triggers in long-term cash incentive plans, deferred compensation plans, and even broad-based employee benefit plans. There also can be anti-assignment clauses in employment agreements that could impact a proposed transaction. Each company is different so working with outside counsel to do a thorough review is recommended, although the following box of specific considerations will hopefully serve as a starting point for this process.
Once you and your outside legal counsel have a handle on what will happen under compensation arrangements, benefit plans, and services agreements with benefit plan vendors, the next natural questions are “is that enough to reward, retain, and incentivize key employees?” and, if not, “does the company want to implement any other arrangements, plans, or bonuses?”
Below is a non-exhaustive list of considerations for heightening employee protections and entitlements in the transaction context. Companies should work closely with outside counsel on whether any of the considerations listed below should drive them to implement any new arrangement and what form those arrangements should take.
Equity Compensation Plans and Awards
As noted above, one of the most common compensation arrangements that includes a change in control trigger is the company’s equity plan. In reviewing the equity plan, determine whether the equity plan provides for automatic treatment on a change in control (such as accelerated vesting of any unvested awards) or whether the plan provides a list of discretionary alternative courses of action that the plan administrator can take with respect to equity awards. The company and its advisors should determine whether any individual award documentation deviates from, or overrides, the treatment provided for in the plan (i.e., the plan does not provide for specific treatment, but some individual award holders have individual agreements that provide accelerated vesting). Treatment of equity awards in the context of a transaction are described in a prior ML BeneBits blog post in more detail.
In addition to considering how outstanding awards will be treated, there are several considerations listed in the following practical tips box that may come up in a proposed transaction. The following specific considerations involve complex legal implications and nuanced economic impacts so consider bringing in outside advisors in early and often.
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