The benefits include acceleration of unvested stock options, and salary and health benefit cash payouts.
Usually the benefits trigger when involuntary or constructive termination of the employee upon the closing of an event constituting a change of control. Examples of when a change of control event occurs include: (1) a merger or consolidation of the employee’s company with or into any other corporation or other entity, or sale of all or substantially all of the assets of the company, unless the shareholders of the company immediately prior to such transaction hold at least fifty percent (50%) of the outstanding equity securities of the entity surviving such merger or consolidation or the entity purchasing such assets, or (2) upon a sale or transfer of more than 50% of the company’s voting securities to a person(s) acting as a group, who is(are) not controlled directly or indirectly by the company, in a single transaction or series of related transactions.
One thought is that these benefits are necessary in order to attract executives to take the risk to stay for the long term at companies that are likely acquisition targets, not flush with cash, or otherwise possess some instability. It gives key personnel the incentive to stay and take on an ownership mentality, at companies, though other job opportunities may arise in the changing environment.
This seems to be the implication with one software company headquartered in Cupertino, CA. This company reported on several Form 8K filings with the Securities Exchange Commission (SEC) from around January 2006 through April 2006, that its Board of Directors’ compensation committee approved amendments to change in control severance agreements, and base salary merit increases, for several of its executive officers, only a few months prior to its announced acquisition in April 2006.
Another example is a software company headquartered in Mountain View, CA, which reported in May 2006, on Form 8K with the SEC, modifications to severance benefits agreements for several of its executives, to extend salary and health payments from 6 months to 12 months following the date of termination or resignation, and the 100% acceleration of any unvested options to purchase shares of the company’s common stock, upon a change of control. Immediately after the public announcement, there was speculation evidenced by postings on public message boards that the company was up for sale.
Are these benefits disadvantageous to company investors, creditors, or other stakeholders? When these significant agreements with executives are reported in SEC filings, do they indicate the companies are acquisition targets or in some way troubled?
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