This is actually about executive compensation. Not just any executive but senior, senior executives. If you have not noticed, we live in a brave new world where many public companies are seeing large blocks of their stock being acquired by private equity companies like Blackstone, Carlyle Group, KKR or Bain Capital. To discourage these often hostile takeovers, many businesses have developed plans to make the takeover financially unattractive.
The one we have observed in recent years that should be evaluated in a divorce setting is an employment agreement that contains special “change in control provisions.” Many large companies have various forms of equity and pseudo equity arrangements like stock options, restricted stock, performance stock and phantom stock awards. The goal of these plans is to retain senior managers and incent them to drive profits and stock price higher in the hope that if they remain with the employer they will share in advances in stock price. Most of these plans have graduated vesting of the incentive equity over three years. To ward off hostile investors bent on takeover, the employer writes into the agreement that, should there be a change in control of the company, all unvested grants vest automatically and must be paid out to the employee. Thus, if a takeover target is “acquired” the acquiring company has to cash out not only what is vested in employee equity but the unvested piece as well. That can crimp the cash position of any business but in recent years private equity investors have not been much deterred by these disincentives.
So, many of us review employment agreements and often they contain obtuse references to things like “change in control.” Don’t skip over those clauses too quickly, because you could find, as I have in two recent cases, that a buyout of the employer vests all options or other contingent arrangements and makes the employee eligible for an immediate payout of what was a form of deferred compensation. Note as well, that some emoluments like pensions, non-qualified retirement plans and other forms of benefits may be “supersized” by the acquisition experience. The pension that was $3,000 a month, might magically become $6,000 without the employee spouse doing more than being on payroll when the magical event occurs. Even if these blessed events occur after separation, they commonly arise under the terms of agreements or awards made before separation. They are enhancements coming about not because of post separation labor or contributions but simply, “because” the employer was targeted for a buyout.
So back to Roy Rogers and his famous steed. A single “Trigger” acceleration occurs when one event triggers the acceleration of vesting, allowing an equity owner to receive the full or partial value of his or her stock. Typically, they are related to the sale, merger or restructuring of a company.
These arrangements have evolved over time. In olden days, no business wanted to be “acquired.” But over time some companies have not been so opposed to corporate courtship. They realize that many employees would take the enhancements and walk out the door for other pastures and that this was a pronounced “negative” to potential corporate suitors. So they developed the “double trigger” enhancement. Double trigger requires two events before enhancements and automatic investing occur. The first is the acquisition, just as before. The second is the termination of the employee without “cause.”
Single trigger acceleration is unpopular with investors who generally want to position the company for acquisition. One of the first things that acquirers review as part of their due diligence is vesting acceleration rights. This is because they largely want to ensure continuity of the talent and operations that made the company prosperous in the first place. If a key employee has a vesting acceleration right upon the company’s sale, then the buyer is at risk of losing the talent that built a successful organization.
For this reason, single trigger acceleration of vesting that’s conditioned on an ownership change is unpopular. It means that if the new owners want to retain these employees, they’ll need to sweeten the pot to incentivize the original employees to continue with the new organization, driving up the cost of the transaction. On the other hand, vesting acceleration clauses can lead to a lower acquisition price to offset buyout costs. The result is diluted stock value for shareholders and investors.
A double acceleration clause requires two events to trigger vesting acceleration. One event is the sale or merger of the company, and the other is usually termination of the employee without cause. These are more attractive to potential buyers since they tend to promote mutual benefits to both the key employee with the acceleration rights, as well as the acquiring entity. Rather than triggering automatic acceleration upon the event of a company’s acquisition, another event is required in order to trigger vesting acceleration; the employee’s termination. Many acquiring companies want to keep the acquired management and or sales force in place. Those are the geese that laid the eggs the acquiring company wants to keep producing. So the employment agreements for these individuals don’t make the special vesting occur until the employee is terminated. The acquiring business would rather keep its powder dry to pay retention bonuses or provide other incentives as part of the acquisition. These, alas, are probably post separation enhancements. But if the employee is released without cause within a defined period (typically 24 months) after closing on the merger or acquisition, that severed head is going to vest in many different forms of deferred compensation based on the original employment agreement.
Every case with an important executive merits a request for all agreements between employer and employee-spouse. Those agreements merit attention for the reasons we have specified above. Because many employees may someday be invited to waddle over to the Fixins bar for a heapin’ helpin’ of vested options and benefits. A non-employee spouse or former spouse may be entitled to a share of the fixins.