Companies Might Consider Tweaks in their Definition of Change in Control Based on Recent Federal Court Decision
In November 2020, A federal court in the Northern District of Illinois (Chicago) evaluated whether a change in control had occurred under the definition of the company’s Executive Severance Agreement plan (“ESA”), in Sharp v. Navistar International. Plaintiffs were former executive employees of Navistar and participants in the ESA. The ESA provided executives increased severance payments if they were terminated within 36 months of a change in control of the company. Plaintiffs received standard severance benefits following their terminations, but claimed they were entitled to the greater change in control benefits.
In 2011, two well-known activist investors separately began to buy shares of Navistar stock through their respective investment firms, eventually accumulating more that 25% of the outstanding shares. Each demanded two seats on the company’s board. Importantly, the two investors disliked each other, having once worked together and parted acrimoniously. Ultimately, each investor accepted an offer of one board seat each and a third to be mutually agreed between them. In October 2012, three of the company’s sitting board members resigned and were replace by individuals selected by the investors. A fourth board member also resigned in October and was replaced by the board.
The ESA had a fairly standard definition of change in control, which would be triggered in the event, (i) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the 1934 Act) is or becomes the “beneficial owner” . . . directly or indirectly, of 25% or more of the combined voting power of the company’s then-outstanding securities, or (ii) incumbent board members and new directors whose appointment or election was approved by the vote of at least 2/3 of the directors then still in office (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including a consent solicitation, relating to the election of directors) ceased to constitute more than 3/4 of the directors then-serving on the board.
The plaintiffs advanced two arguments in support of their contention that there was a change in control at the company. First, the plaintiffs argued that there was a change in control as defined under the ESA because the investors were a “group” whose ownership interest in Navistar exceeded 25% of the company’s outstanding shares. Second, the plaintiffs argued that a change in control occurred as defined under the ESA because three or more seats on the company’s board of directors had changed in connection with a threatened election contest. The company argued that the two investors were not acting as a “group” and that neither investor had actually threatened an election contest.
The court ruled in favor of the company on plaintiffs’ first argument. The evidence indicated that, although they had the same goal, the investors were not working together or coordinating. In fact, as noted above, the evidence indicated that the two investors did not like each other. However, the court decided to let the plaintiffs’ second argument go to trial. The communications among the parties suggested that the threat of a proxy contest was implicit.
What Companies Should Do Now
A company’s board and compensation committee should considerwhat result it would want under circumstances like those Navistar faced. The board and/or committee should review the definition of change in control in its plans and agreements. Note that the company’s executives are likely to have an opinion on this matter.
-Mike Melbinger, CompensationStandards.com March 17, 2021
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