This post was contributed by Éric L’Italien, Lawyer, Norton Rose Canada
Given the shaky economy over the past couple of years and the reduced number of takeovers, mergers and acquisitions, one would have expected a decline in indirect compensation such as golden parachutes.
However, according to a recent Alvarez & Marsal study, there has been a 32% increase over the past two years in the average value of the change-in-control benefits (i.e., golden parachutes) provided to US executives. Considering that the evolution of change-in-control benefits in Canada tends to be influenced by what takes place in the United States, it’s likely that a similar trend exists in Canada.
Change-in-control benefits generally take the form of an employment contract clause by which the company agrees to pay the employee (usually an executive) significant benefits in the event of a change in the company’s ownership. These benefits are typically severance payments, bonuses or stock options. Such benefits are rarely, if ever, tied to performance.
This practice has made shareholders and boards of directors reluctant to reach agreements that enable executives who haven’t been terminated or had significant changes made to their terms and conditions of employment to receive benefits upon a change-in-control.
According to a study released in February 2012 by the Hay Group, 83% of businesses in Canada listed on the S&P/TSX 60 have a change-in-control policy in place. Among these businesses, 98% have a double-trigger change-in-control policy.
However, the Alvarez & Marsal study confirms that single-trigger parachutes—the ones which enable executives to claim benefits as soon as a change-in-control occurs regardless of any change in employment—are still, at least in the US, frequently used in conferring benefits upon a change-in-control.
Needless to say, the Alvarez & Marsal study will be of interest to anyone interested in the dynamic of selling and acquiring a business. Even if golden parachutes typically play little role in deciding whether to acquire a company (depending, of course, on the parachute’s size relative to the value of the projected transaction), we’ve noticed that the importance of the benefits they involve have caused shareholders and boards of directors to pay more attention to them.
Given that other means exist to discourage a hostile takeover and getting rid of management, golden parachute clauses should be drafted with a view to achieving a balance between minimizing corporate waste and ensuring management can objectively evaluate bids to complete mergers and acquisitions that are in the best interest of the corporation. It all comes down to ensuring that the market is as efficient as possible and that decisions are made following an unbiased process.
From the shareholders’ and the company’s point of view, legal representatives should ensure that executive employment contracts require at least a loss of employment, a resignation for good reason or significant changes in the terms and conditions of employment before benefits are paid in a change-in-control.
Additionally, consideration should be given to stipulating the types of changes to the executive’s terms and conditions of employment that would constitute a significant change and trigger payment of a golden parachute.
This would minimize the possibility of executives benefiting from a substantial golden parachute payment while remaining employed by the company. As the Hay Group study shows, this may be a tendency that is spreading in Canada, but one must be aware that some single-trigger provisions still exist and it may be a good idea to replace them with double-trigger provisions, as these make more sense for the shareholders and the company.