Are you a public company executive who is, or will be, affected by a change in control event, such as a spin-off? Do you have concerns around how the transaction will impact your LTI and other compensation benefits? Is there a plan in place allowing you to maximize benefits going forward? In this episode, we address personal financial planning considerations every executive should be asking when they’re impacted by a change in control event.
Are you a public company executive who is, or will be, affected by a change in control event, such as a spin-off? Do you have concerns around how the transaction will impact your LTI and other compensation benefits? Is there a plan in place allowing you to maximize benefits going forward? In this episode, we address personal financial planning considerations every executive should be asking when they’re impacted by a change in control event.
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Mon, 5/2 10:46AM • 23:44
SUMMARY KEYWORDS
executive, company, equity, awards, transaction, m&a activity, executive compensation, situation, performance, investment advisors, investment, discussion, forward looking statements, agreements, incentive, generally, advisor, question, attorney, mike
SPEAKERS
Matt Witter, Voiceover Artist, Jordan V, Disclosure Voice Over, Mike A
Voiceover Artist 00:00
Welcome to equity granted an executive chat, where we help guide you, the senior-level corporate executive of a publicly traded company toward Personal Financial Peace of mind. In the coming weeks, we'll walk you through financial parity planning when choosing career paths, pension decisions, General stock based compensation, planning for the special needs of a family member, and planning for the International expatriate executive. SFG’s sister company is SFG Investment Advisors, an SEC-registered investment advisor. Our website is sfgadvisors.com. spelled S as in Sam, F is in Frank, G as in George, advisors.com.
Matt Witter 00:52
Hello and welcome to SFG wealth planning's podcast called Equity Granted: An Executive C hat. This is Matt Witter, and I'll be your host today. The discussion today will be centered around the types of questions executives should ask when planning for a change and control event and its impact on their personal financial wellness. In this episode, we address personal financial planning considerations, legal considerations and trends related to executive compensation and m&a activity. Please note that tax advice is outside the scope of this discussion. I'm very excited to introduce our guest today Mike Andresino. Mike is a partner at ArentFox Schiff in the Boston office. Mike's diverse practice includes private equity, mergers and acquisitions and capital raising. In addition, Mike routinely advises clients on public company disclosure and compliance, executive compensation, stock plan, design and administration and technology contracting and licensing. He focuses on early stage through middle market technology companies in the software consulting, FinTech, ad tech, medium and healthcare industries. So welcome, Mike. Thanks for joining us today.
Mike A 02:01
Thanks, Matt. I've been looking forward to our discussion.
Jordan V 02:04
According to PwC is global m&a industry trends 2022 outlook, m&a activity reached record levels in 2021. Exceeding 62,000 deals globally, and up 24% from 2020. While PwC doesn't expect another record breaking year, all indications point to another solid year of activity with an abundance of capital. And companies in all industries need more technology. key drivers of m&a activity can also include divestitures, ie spin offs, D mergers, and agility. The driving forces behind these changing control events can include shareholder activist campaigns, and CEOs placing greater value on the ability to be nimble. Are you a public company executive who is or will be affected by a change and control event, such as m&a or a spinoff? Do you have concerns around how the transaction will impact your LTI and other compensation benefits? Is there a plan in place allowing you to maximize benefits going forward?
Matt Witter 03:13
Excellent. So let's just jump in here. You know, most of the questions today stem from the NCOs book called selected issues and equity compensation, given how m&a activity has picked up in recent years more executives are finding themselves trying to understand how a major change in their company could be a spin off, for example, how that affects their compensation package. So that being said, what would you tell an executive who recently learned that their company is being split into two companies as it relates to their long term incentive compensation,
Mike A 03:42
The first step is gathering all the relevant documents, the plan and any award agreements, you should not necessarily count on the company to take care of those things for you, or to do it on your schedule. So you're going to want to start with the documents because that'll form the basis of the company and your own legal and business position.
Matt Witter 04:06
What would you say then? What kinds of long term incentive compensation changes? Can they anticipate if the company hasn't disclosed anything yet,
Mike A 04:15
Oftentimes, this is not the first or even the 101st thing that gets done on the checklist of things that have to be done in a change of control situation. In other words, companies will very often make assumptions that the executives are going to go along with whatever they know, the company ends up negotiating, and it's not necessarily the case that this will have been thought out in advance, that's, that can be good and bad. The bad part is, then the executive may be ready to discuss this before the company is and then the company ends up oftentimes putting pressure on the executive team to kind of agree and go along to get along without a lot of time for it. discussion or even sometimes understanding. But the good thing is if the executive is proactive, they can get involved before everything set in stone and have an impact on how the arrangements go. To address your question, the big issue in any change and control or spin off situation, are the existing awards going to essentially be terminated, paid off, cashed out, etc? Or are they going to in some way be assumed or substituted? So that they, as much as possible, continue after the change of control?
Matt Witter 05:35
So that kind of dovetails into the next question here? How are long term incentive awards typically handled? And what are the chances that the existing awards will be modified and ultimately paid out later than originally planned?
Mike A 05:50
In a public to public situation, so either acquisition of a public company by another public company, or a spin off or split up of the company, so there'll be two public companies, the plan is most often to try to keep the equity as it is, and have it assumed or substituted with as close as possible, the same incentives going forward in the situation where you've got a private equity, going private transaction, or private equity sponsor, buying a public company, so you've got Public to Private, there, it's more common for the equity, for there to be big changes for the existing equity to be paid out to the extent there's value in it. And for completely new equity, sometimes of a new company, often these days an LLC, with completely different equity interests from the stock options, or restricted stock or other long term incentives that the executive had before.
Matt Witter 06:54
So very big difference going from public to public versus public to private and important to be mindful of the differences. Now, the first question I asked, I know you touched on this, but I'm wondering, can you elaborate a little more, can you explain how existing award agreements come into play as part of a major transaction?
Mike A 07:15
It will generally be the case that the existing award has provisions that govern a change of control. First thing that has to be determined is the company experiencing a change of control under the existing agreements, if if a company is being split up, but you are part of the half that's kind of remaining in place, then it may be that there's no change under your agreement, things may be written, you know, there's situations that come up where you can end up with two changes of controls. One when the company sells a division or spins off a division, and then the remaining company and an ending up being sold. So the the agreements and the definition of change of control in the agreements is important first, and you it's it's likely that you're not going to know enough the executive unless they're involved in the negotiations over the change of control, probably not going to know enough to know exactly how the change that's under discussion plays out under their agreements, but it's the agreement is the starting place. And that's within the executives control, at least to know what that is.
Matt Witter 08:28
And get help from a qualified, you know, financial advisor or a qualified Executive Compensation attorney to help you know, translate the language in those award agreements.
Mike A 08:38
Well, the tax considerations are kind of beyond the scope of this discussion. The the executive needs someone who understands the securities laws and corporate governance ramifications of the agreements. And someone who understands the tax considerations. The former is generally an attorney or could be a comp consultant. But, you know, generally an attorney who's familiar with these things, and the latter is either going to be a you know, a tax attorney or or an accountant.
Matt Witter 09:15
Sure, that makes sense. So in a transaction, long term incentive awards are typically cashed out assumed they could be converted or canceled. I know you mentioned a couple of those earlier. In your opinion, what's the most from your experience? What's the most common treatment that you've seen and how's it used to retain key executives?
Mike A 09:35
The most common treatment is for the awards to be either assumed or canceled and substituted for new awards under the acquiring companies plan, with as close as possible to the vesting and other conditions being retained that's generally considered fair to both parties. And that should be the standard. I think that an executive should try to hold the company so it may be in the acquiring company's interest to seek to reinvest the equity, and impose other conditions that weren't there before. I think as an executive, you've got a, a reasonable basis for pushing towards the sort of market outcome, which is that as as much as possible, their existing equity should be replicated by the acquiring company, sometimes that's not possible in terms of, you know, just the awards that are granted, it may be that, you know, you're at a company that did all stock options, and you're being acquired by a company that, you know, has equity, that's all in restricted stock units, but it is, it's possible to eat even those things out with with some sense of rough justice. And I think the, the executive and his or her advisers need to be kind of on guard that that the company's not retreating reinvesting otherwise, taking advantage of the situation,
Matt Witter 11:19
Right, and obviously, executives don't want to be taken advantage of in that transaction type situation. And it makes sense that assumed or canceled is the most common, if cashed out was the most common, you know, there's, there's less incentive for the executive to stay. And it could also result in undue tax consequences, which is really difficult to plan around to.
Mike A 11:42
In the public to private situation, it is more common that your equity would get cashed out, although those companies are often in a position to allow you to rollover some of the equity in a tax deferred way into equity of the acquiring company, you know, cashing out makes sense. And you can sometimes mitigate the what would otherwise be the tax consequences, at least with the portion that you're willing to roll over? And take a continued bet on the company. But in a, in a public public situation, or, or a spin off situation? I would say that it's less common and more common to have equity be assumed.
Matt Witter 12:29
So how do companies ensure that their executives retain maximum value of the awards, when the performance criteria is expected to change?
Mike A 12:39
We talked about the negotiation that might take place, there's strength in numbers, and certainly I've been involved in situations, both on the company side and on the executive team side, where if the executive team, the members of the executive team that have a common interest, get together and negotiate on a common basis, even you know, sharing the cost of the advisors, that can often be a benefit for them, and is not necessarily a bad thing for the company, either because the company would rather have one negotiation, then, you know, seven or eight separate ones. So that's something to think about is, you know, when it seems like a transaction like this is on the horizon for executives to get together, and try to, you know, negotiate together over what's going to happen with their equity,
Matt Witter 13:35
I'm switching gears performance based equity is obviously becoming increasingly relevant and important. You know, because of how it connects, you know, shareholders and executives, mutual incentives to succeed, you know, it's becoming more and more common. So how is performance based equity typically handled, for example, in a spin off transaction?
Mike A 14:01
In a spin off the most common treatment for performance based equity, meaning something that's based on total shareholder return, the most common treatment would be to handle that as, as the executive is deemed to have attained the performance targets within the equity. That's, that's generally the way it's done. And, in fact, there's oftentimes a negotiation around that. In terms of whether the targets have been achieved, you know, it's kind of 1x 2x or 3x. Under the performance targets, in a straight sale of a company. It would be common for there to be a period of time that you've got to work after the sale. to reinvest in the equity. I think an executive would have to assume that in a sale of that company, there's going to be some re-vesting period where they'll have to perform.
Matt Witter 15:07
You had to stay with the company for the respective time period and continue to incentivize with hopefully what's to become more upside for them than what they currently have. Exactly. So the next question has to do with legal considerations. I know this is your world as an executive compensation attorney, what kind of legal considerations does an executive need to think about as it relates to their compensation, both pre transaction and post transaction?
Mike A 15:33
The executive would benefit greatly, as, as I mentioned earlier, by first seeing who else has a common interest with them kind of Joining Forces, as a team, and negotiating in that way that's going to help the executive achieve the best outcome and any change or control situation, the executive needs to retain counsel, whether that's one person or one firm that provides them with the Securities and governance, negotiation expertise, and another group for the tax matters, but those are both going to be important, especially pre transaction, post transaction, things should resolve themselves pretty quickly. And I'll say, you know, kind of stabilized and go back to normal the there's a great upheaval in any m&a situation, whether it's a sale of the company or spin off. And that's not sustainable, you can't be worried as an executive about your own equity situation all the time. Generally, you're not and you weren't before the change of control came up. And you've got to worry about it during the change of control. But the executive teams got to go back to managing the company and not worrying about their own situation pretty quickly afterwards, if they don't, if that's a continuing source of angst, then something's wrong. That's not a well handled, or well integrated situation. And that's, that's, that's the company's fault. If that's happening, not the executives fault.
Matt Witter 17:17
Yeah. So being as proactive as possible, you know, from a legal standpoint, and certainly a tax standpoint will help minimize surprises to you know, what other trends are you seeing as it relates to executive compensation and m&a activity?
Mike A 17:32
I will say there's a continuing trend towards more performance based equity. Rather than time based equity, if you're at a company where most of the incentive is strictly time based, there's probably going to be a change for you. And you'd have to expect that because you'd have to expect that your company has, you know, maybe somewhat lag behind in that respect. If you're not subject to performance based conditions for your equity. Now, you'd have to expect to be, and that would be true, whether it's a public to public or public to private situation.
Matt Witter 18:13
So get ready, because it's coming, right?
Mike A 18:16
Yeah, it would not be genuine to say performance based equity is a trend, but not every not every company has it to the degree that I think it's permeated the market.
Matt Witter 18:29
Yes, some companies have some catching up to do in that regard. So lastly, you know, during a change in control, when do you advise is the best time to seek professional advice from an executive compensation attorney, or a CPA or a financial adviser?
Mike A 18:46
I'm glad you asked this, because this is something I should have addressed. So whenever, you know, whenever you ask any of your podcast guests, they would always say, yeah, get involved early. Here's the dynamic that often happens that I often see here. And when I would rather see something happen instead, it's often the case that an executive or the group of executives doesn't seek any advice until they're presented with a pile of documents. And as I mentioned earlier, oftentimes those are the last documents to get put in place, then when and when those documents are ready for the executives to sign. The company doesn't expect any pushback and as often putting people under a great deal of time pressure. So you can't wait for the company to put documentation regarding the change in your equity into your hands. And then you know, then look for a lawyer or tax advisor and react to it then you've got to be proactive and gather your documents about your own situation and start thinking about it. and pushing the discussion forward before the documentation comes out. That's if I could give one piece of advice that would be it is, have your have your counsel in place, before you see the pile of documents, not afterwards,
Matt Witter 20:17
Executives are already dealing with so much that they have on their plate. And, you know, I know we've found I'm sure you found the same executives tend to be excellent delegators because of how much they have on their plate. And so getting that information out early and often to your professional advisors is critical, you know, to make sure all the right questions are asked and that, you know, the executive has, you know, as ferment of understanding as possible before any type of transaction occurs.
Mike A 20:42
Exactly, exactly. And, and I don't make the mistake of thinking, well, there's nothing for my advisor to do, because we don't have anything to look at. Yeah,
Matt Witter 20:54
Yeah. Well, Mike, thank you so much for joining us today. You've given us some invaluable insights. And I trust our listeners found this conversation to be helpful and timely for when their company experiences a changing control event. And to our listeners. Thanks so much for tuning in. Today. We trust that you found value in our discussion on this very important topic as it relates to your personal financial wellness. Please feel free to call us at SFG Wealth Planning, if you have further questions and also please feel free to reach out to Mike directly if you need assistance from a qualified executive compensation attorney regarding the topics that we discussed today. So we hope you'll join us for the next episode. Thank you.
Disclosure Voice Over 21:39
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