Grasping the target’s remuneration programs and approaches as well as determining how to incentivize top management are pivotal elements of any fruitful merger or acquisition, as pointed out by Ian Sherwin, a partner at Reed Smith, specializing in executive compensation and employee benefits in M&A and other transactions, writing for Bloomberg Law.
Compensation frequently directly influences a target’s primary decision-makers – people who may have the power to decide whether to proceed. In fact, executive compensation can turn into one of the more costly elements in a deal when accounting for incentive equity, base salary, bonus opportunities, severance entitlements, and health and welfare programs. When taking into account the myriad of tax, securities, corporate, and employment-related rules revolving around executive compensation, the result is a vital area of law.
In depending on the nature of a transaction, different executive compensation-related aspects need to be thought through. Confidentiality isn’t a major consideration if the target is a private company. However, it becomes a significant concern with public targets, where there will be substantial disclosure obligations for senior executive officers at the very least.
Transactions can either be true acquisitions where one entity purchases the other, or they may take the form of mergers of equals. In the latter scenario, it becomes crucial to understand who will make compensation-related decisions in the newly amalgamated company.
Alongside this, it’s key to mull over which party will shoulder any severance obligation catalyzed by the transaction, irrespective of whether the executive accepts the new employment offer. The transaction’s form of consideration becomes another vital consideration when dealing with incentive equity awards, focusing on whether employees will receive liquidity, revel in any kind of windfall, and/or whether they have adequate cash on hand to cover any tax obligations that crop up in connection with the vesting and/or settlement of outstanding equity awards.
In a deal scenario, employees often feel uncertain due to worries about being labeled as expendable and possibly laid off. One potential solution to sustain performance during this disquiet is offering severance protections in case of involuntary termination.
Another area worth attention for the buyer is establishing certain restrictions around what the target can do during the period separating a transaction’s signing and closing. Regular prohibitions include: changes to an existing benefit plan; heightening compensation, benefits, or severance; hiring or firing staff; and granting, vested, or executive incentive equity rewards.
Sherwin also highlighted the significance of the golden parachute rules in most transactions, specifically Sections 280G and 4999 of the Internal Revenue Code. If golden parachutes are initiated due to certain compensatory payments being funded, vested, and/or settled in relation to a change in control, a 20% excise tax could be charged to certain service providers of the target, and a loss of compensatory tax deduction might occur for the target.
Ultimately, to surge ahead successful M&A transactions, it is crucial to fully understand and carefully consider all aspects, rules, and regulations surrounding executive compensation.