Understanding Change in Control Provisions

January 25, 2018
The Law Firm of J.W. Stafford

Executives need to ensure their employment contracts provide them with the protections they deserve given their high-level positions and their level of expertise.  A Baltimore employment contract lawyer can assist executives in understanding how employment agreements are structured and can assist executives in understanding key clauses to include in contractual agreements.

One of the key things that executives must know about are change in control (CIC) provisions. Change in control provisions can benefit both an executive and the company that employs the executive. There are plenty of reasons to ensure that, as a business leader, you have this type of agreement in place to protect your interests. You should work with an attorney on negotiating its terms in your employment contract so you have a fair CIC agreement at any company you lead.

What Executives Need to Know About Change in Control Provisions

Change in control provisions are often colloquially known as golden parachutes. They ensure that if an executive must lose his or her position, the executive is appropriately compensated.  Companies benefit from these provisions and offer them to certain executives to ensure that company leaders can fulfill their fiduciary duty without an inherent conflict of interest.

While executives may be reluctant to seek out merger opportunities to benefit shareholders if doing so would mean losing their own position, a golden parachute ensures they would be well-compensated were a merger to occur. This removes the disincentive to aggressively pursuing mergers by keeping executives neutral to job loss. This is especially important in industries, including the financial industry, where mergers and acquisitions commonly occur.

Companies recognizing the value of removing the potential inherent conflict of interest between protecting a job and protecting a company has resulted in many executive-level personnel across all industries routinely being offered change-in-control provisions. In recent years, trends have been towards CIC plans for multiple employees, rather than each individual executive negotiating an individual change in control plan.

When there is a general plan, conditions for payouts when control changes are set the same for all executives at each particular level who are party to the agreement.  This can ensure executives at each level are treated consistently and appropriately. Streamlined CIC agreements applicable to all executives at specified levels also makes it easier to administer the agreements.

CIC agreements, either individual ones or contracts applicable to multiple executives, should not only set forth when executives will be paid if there is a change in company control but also should stipulate how the amount of compensation should be determined.

One Key Issue: When Equity Awards Vest 

Traditional CICs often resulted in an executive’s equity awards vesting after a change in control, regardless of whether the executive actually lost his job or not. This was referred to as a single trigger, but it has the potential to create a windfall. As a result, some companies have switched to a double-trigger protocol in which both a change in control occurs and an executive actually loses his job before equity vests.

You’ll want to ensure you fully understand the terms of change in control provisions and should work with a Baltimore employment contract lawyer if you are an executive negotiating your employment contract or if you are an executive employed by a company for which a change in control has occurred. Contact The Law Firm of J.W. Stafford, L.L.C. at 410-514-6099 or reach out to us online today to find out more about the help available to you.