When a professional sports team hires a new general manager, it makes the head coach nervous. Why? Because GMs often want to hire their own head coach.
The same is true at the top of corporations. When control changes, top executives can be placed in precarious positions.
The risk that accompanies a change in control can be mitigated, however, through the use of change in control provisions in employment contracts.
In this post, we will look at two elements that are present in effective CIC provisions.
Define “changes in control”
One mistake that’s sometimes made with CIC provisions is they are not specific enough. For example: what triggers the CIC provisions? If the definition of change is vague, it can be difficult to receive the benefits that are specified in the CIC provisions.
Examples of changes in control can include:
- Merger
- Consolidation
- Acquisition (change in ownership)
- Changes to the board of directors
- Termination of employment
CICs can have one or more triggers. A single trigger means the CIC provisions are activated when one event occurs — a merger, for example. A double trigger means two things need to happen to activate the CICs — a merger and a termination within 12 months of the merger, for example. Obviously, a single trigger CIC is more favorable to an executive, but double triggers are much more common.
Specify the compensation
The CIC provisions that make headlines are those that deal with compensation. Here are examples of compensation that can be included.
- Severance pay: This often is defined as a multiple of the executive’s current compensation (pay and bonuses). Multiples of one or two are common.
- Acceleration of vesting: Ownership of equity often is time-sensitive. A CIC provision that accelerates vesting often calls for 100 percent vesting upon a change in control.
- Release of equity restrictions: Removal of any other restrictions to that apply to the executive’s control of equity.
- Retirement plans: Full vesting in bonus payments are an example.
CIC provisions can include other things of value, such as continuation of health benefits.
Get answers
If you have questions about CIC provisions, contact an attorney with experience in this area of employment law.