M&A - Checklist for Targets

ExecutiveLoyalty.org

Change in Control Compensation Planning Checklist

(for potential seller and target companies)

Before merger or sale negotiations begin, potential sellers (or targets!) should get their severance house in order, with the following precautionary steps being worth consideration:

All Plans and Employment-related Agreements

1. __ Create a Pre-closing Protected Period?

If the closing a CIC transaction triggers enhanced protections, consider whether they could be taken away on the eve of a closing. If that is a risk, the establishment of a pre-closing protected period could provide executive's with valuable peace of mind assurances.

2. ___ Hard-wire Post-closing Decision-makers?

Absent a plan provision, the buyer in a transaction has the power to make post-closing benefit determinations, such as whether a qualifying termination has occurred and how much is payable.
A plan (or agreement) may provide that, following a CIC transaction, benefit determinations will be made by parties independent of the buyer (such as an independent law firm or fiduciary, or a committee of the seller's executives or former employees).

Executive Retention and Transitions:

3. __ Lock-in change-in-control (CIC) benefits to assure key employees stay with the company until a transaction closes?

As a general rule, those who are not protected will seek to leave soon after a merger or sale transaction is announced.
Retention incentives may come from some combination of CIC severance protections and stay bonuses. As a general rule, the earlier these are promised, the more likely key employees will be retained.
See CIC Survey Data for information about reasonable severance levels.

4. __ Evaluate and address Golden Parachute Risks?

It is always best to identify golden parachute tax risks at the earliest possible time, because employers and executives both suffer if penalties are triggered.
Early identification of problems often allows for a negotiated solution.
For further information, see Golden Parachute Tax Rules.

5. __ Create a springing rabbi trust in order to signal an intent to deliver deferred compensation and severance without risk that a buyer will dispute or delay payment?

This protection may be secured through a simple paragraph added to a severance plan or to an employment or severance agreement.
See Rabbi Trusts: When to Seek; What to Get

6. __ ERISA-fy plans, in order to minimize the risk and costs of litigating meritless claims?

This employer protection can reasonably be balanced by the post-closing decision-making provision described in the following item.
See "Say Hello to Smart Goodbyes" for reasons to bring a severance plan within the scope of ERISA. Note that an umbrella welfare plan can reduce the IRS 5500 burden.

7. __ Refine noncompetes and other restrictive covenants to reflect CIC considerations, such as enhanced payments or circumstances for their elimination.

See the cases and articles organized under M&A and executive compensation

Retirement and Welfare Plans:

8. __ Amend plans to require their automatic termination before a CIC closes?

For 401(k) plans and ESOPs, this is often immaterial to a transaction and eliminates negotiation over how a transaction affects those plans.
If an ESOP is leveraged and holds appreciated employer securities, a pre-closing termination is the surest means by which to assure that the selling/target company's employees benefit from the unallocated shares (otherwise a buyer could divert some of those gains to its employees).

9. __ Assure post-CIC medical coverage rights greater than COBRA requires?

For senior employees, this can be invaluable - at minimal if any impact on a CIC transaction.