“Is a change-in-control provision in an executive employment agreement the same as a separate change-in-control agreement?”

Question: Is the change-of-control provision in an executive employment agreement the same as a separate change-of-control agreement?

Hyderabad, India

Answer: Overall, the answer is “Yes,” the two are basically the same and serve the same purpose, but differ in what they usually provide and to whom they are provided. (Please note that “change of control” and “change in control” mean the same thing.)

A “change in control” at work means just what it says: an event by which new people have gained control of a company. It might be by purchase of a majority interest, by merger, by change in Board composition, by arrival of new CEO, or in several other ways. Whether a “change in control” has, in fact, taken place, may depend on how “change in control” is defined. For employees, and executive employees in particular, “changes of control” represent a significant risk, mostly because the new “controllers” often want new “controllees,” that is, they often bring in their own, trusted people to run the company. That can mean either dismissal or dismal treatment for existing executives and other employees.

There are two general approaches to protecting employees in “change of control” situations:

(a) Resignation by the Employee Permitted, with Payments: In this first approach, the employee is permitted to resign (if he or she wants to), but is given treatment not as one who has voluntarily resigned, but rather as if he or she was terminated by the company without “cause,” which often means payment of severance (or enhanced severance), acceleration of unvested equity, and other positive treatment. Such treatment may also bring about the voiding of a non-compete agreement.

This first approach to “Change in Control” treatment is primarily given to senior-most executives and the most highly-compensated employees. It represents to these people a limitation on potential risk of taking new employment. We seek to negotiate such treatment into their employment contracts. We see such “Change in Control” provisions in senior executive employment contracts.

(b) Payments to the Employee if Terminated (or demoted, etc.) within a Certain Period: By this second approach employees are given certain enhanced payments (or other positive treatment) if terminated, demoted, transferred, or receive other negative treatment within a certain period after the “change in control.”

This second approach to “Change in Control” treatment is seen much more commonly in “Change In Control” agreements given to employees who are not the senior-most executives or most highly-compensated employees. It serves the same function – limitation on risk during a risky period – and encourages employees to stay on board during transitions.

So, the answer is, “Yes,” change-in-control provisions in executive employment agreements are the “same” as change-in-control agreements, in that they address the risk employees face when control of a company changes hands. It’s just that they are generally provided to two different groups of employees, and generally take a slightly different approach.

Al Sklover

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© 2009 Alan L. Sklover, All Rights Reserved.

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