Negotiating Acquisition Terms For Key Executives

Thursday, May 15, 2008

Vincent Hillery and Robert Fields, Protecting The Interests of Executives In Private Equity Acquisitions, http://

Abstracted from: Protecting The Interests Of Executives In Private Equity Acquisitions
By: Vincent Hillery and Robert Fields Mayer Brown, Chicago, IL (VH); Field Law Offices, New York, NY (RF)
ACC Docket - March 2008, Pgs. 28-35

Retaining the talent is key.
Top executives at companies under consideration for acquisition by private equity buyers are a key asset in the sale. Sellers frequently provide incentive packages to entice the executives to stay through the closing and beyond, and to maximize shareholder value. Buyers and sellers can negotiate benefits, payments, and other arrangements to retain target executives and keep the deal moving forward. The executives all too often choose their own attorneys, many of whom have little or no experience negotiating employment and compensation terms in such transactions. The unfortunate result is protracted talks and complications surrounding the incentive and compensation packages, leading to delayed closings, headaches, and unfavorable deal terms for the seller. Attorneys Vincent Hillery and Robert Fields offer advice on how to retain valuable managers without destroying the deal.

Bonus incentives from the seller.
Components of executives' incentive packages from the seller generally include completion and success bonuses, and a severance package or stay bonus. The seller will pay the completion bonus at closing to key managers who stay until then, the authors explain. The amount depends on factors such as the perceived importance of each executive and the risk that the sale represents to him or her. Payment is usually a specified percentage of annual salary and bonus. The success bonus, designed to align interests of managers and shareholders, is linked to whatever value is added during the sale process, measured by thresholds such as return on investment or revenue. Phantom equity interests, another form of success bonus, tie equity interests to the purchase price. Other forms of compensation may kick in after the deal closes. Stay bonuses go to key employees who remain with the company for a minimum period, typically 12 to 18 months after the closing; the amount depends on the employee's tenure.

Negotiating with buyers.
The authors advise executives to seek a two- to three-year initial term of employment, which will help in establishing a relationship with the new owner. Employment contracts should stipulate merit increases and a guarantee that compensation will not be reduced during employment. The terms of equity co-investments by senior executives ,­a common condition of these transactions, ­should be as favorable as those involving the private equity investor. Buyers should base annual cash bonuses on targets, goals, and other benchmarks during the first year or two of employment. Contracts involving equity grants, which executives usually receive at the time of the acquisition, should specify amounts and terms of equity or stock grants. Negotiating for a single vesting acceleration trigger, such as a change in control, and the establishment of a pre-sale window period to liquidate holdings can help executives to maximize liquidity.

Benefit and termination provisions.
Management should receive the full range of benefits, including health insurance, relocation expenses, life insurance, and financial counseling. Terms of termination agreements will vary with the conditions of the termination. The authors negotiate as narrow a definition as possible for terminations for cause, perhaps including embezzlement or conviction of a felony. Not-for-cause terminations or voluntary terminations should include full severance benefits, including exercise of vested options and a lump-sum payment.

No-compete covenants for employees and customers, the authors indicate, should be limited to a period no longer than one year after termination. Change-in-control benefits should include severance payments and other benefits similar to those payable for non-cause terminations.

Abstracted from ACC Docket
published by Association of Corporate Counsel
1025 Connecticut Ave. NW, Suite 200
Washington, DC 20036-5425

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