Learning From Companies who Successfully Execute a Change in Control

Change in control is something that can turn a company upside down if managed improperly. A good example is found in a recent Forbes publication covering a change in control battle that emanated between Elliot and Arconic. In a nutshell, Elliot had built up interest in Alcoa with a 5% position, one that gave it the ability to introduce three nominees to the board of directors. Doing so would have amounted to a change of control that may not have been in favor of the current sitting board.

In response, Alcoa divided into separate yet joined entities, Alcoa and Arconic. After back and forth between Elliot and Arconic, the power struggle was clear: Change of control was intended by Elliot, but Arconic was not having it. This resulted in Arconic moving to prevent Elliot’s attempts at change, even though they were under the auspices of “increasing shareholder value.”

To protect itself, an 8k was filed that titled: “Amendment And Restatement Of The Trust Agreement Between Mellon Bank N.A. and Alcoa Inc.” In short, it added enormous pension liability to Arconic only in the event that a change of control was processed. In response, Elliot filed a DFAN14A that accused Arconic of breaching their fiduciary through concealment. Basically, Arconic was not going to allow change of control without a fight, and Elliot wasn’t going to back down from their 5% stake.

The Evolving Change in Control

The real purpose of change in control agreements in the present day is to prevent executives from fearing job loss when exploring certain elements of corporate change like transactions, adding or keeping talent, and keeping senior executives relatively immune during such periods. Forward thinking executives need to make sure that the change in control contract they have place protects them with “cash severance provisions, rapid maturation or vesting of equity and excise tax treatments,” advises Daniel Rodda, advisor for Meridian.

The structure of the change in control is something that should be reviewed and consulted with an experienced human resource lawyer that is a third-party to the process. They will be able to provide guidance that helps the executive ensure that their cash severance is adequate, their maturation and acceleration of equity is favorable and that their “excise tax treatment eliminates gross-ups,” advises Rodda.

Change in control is an important contract to have in place for upper level executives. Knowing what elements it should cover and the protections it should offer is something that should be left in the hands of an experienced human resource lawyer. While a boilerplate change in control contract may look lucrative at first glance, it may also contain provisions and stipulations that end up being unfavorable to senior level leadership when it matters most. Never presume that such a contract is to your benefit until fully reviewing and vetting it with qualified legal counsel.