DealLawyers.com Blog

November 15, 2007

SEC Disclosure: Explaining Change-in-Control Arrangements

From Mark Borges’ blog on CompensationStandards.com: As I’m beginning to prepare to help clients with their upcoming Compensation Discussion and Analyses, I’ve been looking at some of the CD&As that have been filed during the past month to see how companies are addressing the “more analysis” dictate of the Staff comment letters and October report. While I’m seeing some differences from the CD&As that were filed earlier in the year, the shift is probably going to be the biggest challenge that most companies face (alongside dealing with performance targets) in preparing their 2008 disclosures.

I was reading through Adaptec’s proxy statement, and liked what I saw in the company’s discussion of its change in control arrangements (page 21 of the CD&A):

“We believe these change of control arrangements, the value of which are contingent on the value obtained in a change of control transaction, effectively create incentives for our executive team to build stockholder value and to obtain the highest value possible should we be acquired in the future, despite the risk of losing employment and potentially not having the opportunity to otherwise vest in equity awards which comprise a significant component of each executive’s compensation. These arrangements are intended to attract and retain qualified executives that could have other job alternatives that may appear to them to be less risky absent these arrangements, particularly given the significant level of acquisition activity in the technology sector. Except for a portion of the grants to our executive officers, as described above, our change of control arrangements for our executive officers are “double trigger,” meaning that acceleration of vesting is not awarded upon a change of control unless the executive’s employment is terminated involuntarily (other than for cause) within 12 months following the transaction. We believe this structure strikes a balance between the incentives and the executive hiring and retention effects described above, without providing these benefits to executives who continue to enjoy employment with an acquiring company in the event of a change of control transaction. We also believe this structure is more attractive to potential acquiring companies, who may place significant value on retaining members of our executive team and who may perceive this goal to be undermined if executives receive significant acceleration payments in connection with such a transaction and are no longer required to continue employment to earn the remainder of their equity awards.”

This explanation not only addresses why the company provides its executives compensation in the event of a change in control, but also explains the reasons behind the primary design feature (the “double trigger”) of the arrangements. I believe that this is type of discussion that the SEC is looking for in the CD&A with respect to each individual compensation element as well as the named executive officers’ total compensation packages.