Last Friday,* I posted on a federal court decision on whether a change in control had occurred under the terms of a company’s Executive Severance Agreement plan (“ESA”) and suggested that “A company’s board and compensation committee should consider what result it would want under circumstances like those Navistar faced.” Well, inquiring minds wanted to know precisely what changes to the standard change in control definition a company might want to consider. Therefore, lest I be ridden out of town on a rail by inquisitive (or irate) readers, today I am posting some possible changes.
Readers will recall that in Sharp v. Navistar International, the investment activities of two activist investors acting independently (that is, not in coordination with each other), resulted in five board members being replaced and the two investors owning more than 25% of the company’s outstanding voting stock. The company declined to pay enhanced change in control severance to executives terminated in the months following replacement of the board members arguing that under the definition in the ESA, a change in control had not occurred because (i) the two investors were not acting together pursuant to an agreement and, therefore, were not a “group” under the Exchange Act definition of that term, which the ESA used, and (ii) the investors had not actually threatened a proxy contest over the election of directors.
If a company’s board would like to protect executives from a situation like that in the Navistar case, where parallel, but uncoordinated, conduct by more than one investor results in a significant acquisition of stock or the replacement of board members (or its executives demand such protection), then it might consider adding language like the following to the definition of change in control in its plans and agreements (using the definition in the Navistar ESA as an example):
A “Change in Control” shall mean the occurrence of any of the following events: (a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934). . . is or becomes (including where the parallel conduct of more than one person not acting as a group results in those persons becoming) the “beneficial owner” . . . directly or indirectly, of securities of the Company . . . representing twenty five percent (25%) or more of the combined voting power of the Company’s then-outstanding securities. . . [or] (b) the following individuals cease for any reason to constitute more than three-fourths (3/4) of the number of directors then-serving on the Board: individuals who constitute the Board as of the Effective Date and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to, a consent solicitation, relating to the election of directors of the Company; provided that any addition or replacement of directors proximate in time to an actual or threatened election contest or solicitation will be presumed to be in connection with such actual or threatened election contest or solicitation) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved by the vote of at least two-thirds (2/3) of the directors then still in office . . . .
Note that the foregoing are only one man’s thoughts (and an old, semi-retired man at that). I welcome comments from readers on this issue and/or the sample language.
More importantly, note that many companies’ boards may desire not to provide change in control severance in circumstances like those in the Navistar case. Those boards may not wish to change their definition of change in control.
-Mike Melbinger, CompensationStandards.com March 18, 2021
