As discussed in previous posts written by my colleagues Victoria Riley and Sara Josselyn, key talent retention is an important consideration for parties to a proposed M&A transaction. The uncertainty of a potential transaction may cause key employees to seek work elsewhere, which could in turn, jeopardize the deal itself. A change-in-control (CIC) severance agreement, however, is one mechanism that can be used by companies to allay concerns and prevent key talent departures.
CIC severance offers enhanced severance to key employees upon a change-in-control. The agreement must define what would constitute a “change-in-control”. Although this definition is often drafted to include a merger, hostile takeover (either through share purchases or through a proxy battle) and liquidation, when drafting, it is important to carefully consider context rather than rely solely on precedent, as the definition can, in certain circumstances, be highly fact-specific. Enhanced severance payments would be owed either upon a single trigger (meaning the occurrence of the CIC event alone) or a double trigger (meaning the occurrence of the CIC event plus a qualified termination, excluding termination for cause). A double trigger is the typical arrangement and aligns with what the Canadian Coalition for Good Governance (CCGG) advises. According to Meridian Compensation Partners a standard severance amount is 2-3x pay for a CEO and 1-2x pay for other senior executives, pay being inclusive of salary and bonus.
CIC severance also provides a cost advantage in comparison to other methods used by companies to retain key talent, namely retention bonuses. Retention bonuses offer cash bonuses to employees who stay for a given period of time after a deal is completed. As stated in this article written by Towers Watson, whereas retention bonuses are automatically awarded to all key talent who remain for the given time period as prescribed under the arrangement, CIC severance, presuming there is a double trigger, is only awarded to those key employees who are terminated after the CIC event. As a result, CIC severance may not be awarded at all.
It is recommended that a proactive approach be taken by companies when it comes to CIC severance so as not to jeopardize the deal and to avoid conflicts of interest during an M&A deal.
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