Big Red Car here. Nice weather in the ATX and that house sitter has been running the snot out of my here for the last couple of days. Oh, a Big Red Car, loves to have the snot run out of it. Eeehaw!
So we need to chat a bit about the implications of change of control in a startup or small company. Delicate subject to be sure.
Change of control defined
A change of control occurs when the current ownership of the company — ownership at the time of effective date of the Employment Agreement — is altered in such a manner that a new individual or group now controls 50% or more of the company’s voting stock.
Now, you can get all lawyerly on a Big Red Car and add a lot of wheras this and that and commas, but the general notion is this — a new group of shareholders (or an individual shareholder) can now call the shots. This group of shareholders — in accordance with the company’s ByLaws — can now elect the Board and the Board can appoint the CEO.
The obvious implication is that the CEO now has a new boss.
In a public company, the new controlling shareholders would have to file an SEC Form 13D disclosing their new ownership position as well as an expression of their intentions.
Actually the group should have filed an SEC Form 13D when they “formed” the group which may have been before they actually acquired a 50% interest. Good luck on the likelihood of that happening.
In any event, the company and the CEO will find out in some form or fashion that the control of the company has now changed and is in the hands of this particular group of shareholders.
Consequences of a change of control
It would not require a huge leap of faith to believe that the formation of a new control group of shareholders is an expression of some potential or even likely discomfiture with the current management of that company. [Uhhh, that would be you, Mr CEO. Haha, Big Red Car, you crack yourself up, don’t you?]
In any event, it signals a change that may have consequences for the CEO and others.
Because of this likelihood, it is often the case that the CEO’s Employment Agreement is automatically terminated as a result of a change of control and that the CEO is then eligible to receive the Severance Package that we discussed here — The C Level Employment Agreement — Severance Package.
It would not also be completely objectionable for a CEO to have a Severance Package Plus — a more generous severance arrangement — in the event of a change of control. The change of control is likely to have been a bit precipitous and thus might merit a more generous arrangement.
As always, the Devil is in the details and for CEOs, the following might be important details:
1. Have the Employment Agreement provide that the termination of the Employment Agreement is automatic and requires no joinder from any other party.
2. Likewise have the Employment Agreement provide that the payment of the Severance Package is also similarly automatic with a specific deadline — one day, perhaps — for its payment. Believe me this issue will not get better with the passage of time.
3. Make it clear that any and all sums owed to the departing CEO are to be paid immediately, including specifically Deferred Compensation.
4. Make certain that the Employment Agreement addresses the issue of withholdings for income and payroll taxes. This may become complicated if the Deferred Compensation is held in securities or other assets which may not be liquid enough to be used to pay income and payroll taxes. Potential big problem.
5. Make certain that the Employment Agreement indicates that the Severance Package is payment of wages for services already rendered. Wages are a protected class of payments which any prudent business person would steer clear of messing with under any circumstances,.
6. Make certain that the Employment Agreement is clear as to the status of the CEO upon the termination of the Employment Agreement — is she an “at will” employee or is she simply gone immediately.
7. Make certain that such issues as competition, employee tampering, disparagement are addressed elsewhere in the Employment Agreement. This could be a trying and contentious time and visiting these important issues just now could be a sticky wicket. [Haha, a freakin’ “sticky wicket”, Big Red Car? Haha. You dope.]