Change in Control Payments and Private Equity
06/08/2007
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With the chief executive’s assistance, a private equity consortium succeeds in a takeover of a public company.  The executive pockets a year’s pay plus the proceeds from accelerated options that vested with the change in control.  The options will, of course, be considerably in the money with the takeover premium.  The next day he/she turns up at the same company on a new package that has the potential to be several times richer than his/her old package.  Is this wrong?   Should there be a variation in contracted payments to recognise the windfall and possible self-interest if a change of control is by private equity?

In the case of a US private equity takeover where management is retained, the practice has been for a percentage of the unvested performance equity (e.g. 50%) to be rolled over as a buy-in to shares in the new company, with the other 50% cashed out on the change in control.  This compares to common Australian practice of either full (i.e. 100%) vesting on change in control or pro-rated LTI vesting in accord with service and/or performance.

In response to concerns, many Australian companies have or are reconsidering changes to change in control agreements with their CEOs.  Most of the changes are to provide the board with more flexibility and scope to adapt change in control payments according to the circumstances.  Aspects to consider include:

• The proportion of the performance period that has elapsed
• The performance to that date
• Whether it is likely the executive will remain in employment after the change in control
• The length of service of the executive
• The total returns to shareholders over the service period relative to competitors
• Market practice

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