A change of control provision provides that if certain triggering events occur, like change in the company’s ownership, the executive is entitled to specified payments and benefits. The thought behind including change of control provisions in employment contracts is that they keep an executive objective, neutral and focused in performing job duties, rather than distracted over concern with a potential company take-over.
Executives and Middle-Management Might Benefit from Change of Control Provisions
You can typically find change of control provisions in executive and upper management contracts. However, depending on the industry, some type of change of control provision may be included at the middle-management level. For example, a company may want to extend a retention bonus to lower executives. This would prevent a “mass exodus” if there is a change in ownership.
A few common transactions that trigger a change of control provision include:
- Sale of assets. This change of control provision will usually address the sale of all, or a majority of the company’s assets.
- Transfer of Company Stock. This change of control provision often involves the issuance of a specific percentage and transferring of any outstanding shares from the main company to the new owner.
- Mergers. This change of control provision is triggered when the company merges with another company.
Other triggering events can include consolidations, reorganizations or other transactions where more than half of the board members change.
Change of Control Provisions Should be Clear and Easy to Apply
The key to a valuable change of control provision is to make it clear, easy to understand and apply. Vague and ambiguous change of control agreements can result in litigation over whether the triggering event has occurred. In addition, change of control provisions can vary widely and can limit the executive’s change of control benefits to more specific events. For example, providing that the triggering event is not just a change of ownership, but also must include a material change in the executive’s duties. In order to protect themselves, executives should negotiate broader change of control provisions to insure that they fulfil their intended purpose.
Rogge Dunn Group lawyers have worked extensively with executives on a variety of employment matters. If you have questions about a change of control provision or another employment matter contact us here.