DealLawyers.com Blog

This recent ClearBridge article on compensation issues in M&A is a useful reference tool for identifying and addressing those issues.   The article covers both pre and post-closing compensation concerns for the buyer & seller, and provides commentary on market practice.  Here’s an excerpt on the treatment of outstanding incentive plans:

Bonus Plans:

– Target Company: Determine treatment of payouts for inflight bonus (i.e., bonus during year of acquisition), including whether to pay bonuses based on target performance or actual performance (if calculable), as well as whether to apply any proration to account for shortened performance period (if applicable)

– Acquiring Company: Determine if impact of newly acquired business should be reflected in performance results for bonus payouts for year of transaction (if applicable), or adjusted out from actual performance results for either all or a portion of the year

Unvested Equity:

– Target Company: Determine treatment of unvested equity per equity incentive plans, award agreements or employee contracts (e.g., single vs. double trigger vesting), as well as treatment of performance awards upon the acquisition (i.e., settle at target vs. actual performance)

– Acquiring Company: Assess dilutive impact of assuming any target company equity, as well as impact of target company performance on any unvested performance-based equity (e.g., excluding performance results for all or a portion of outstanding performance periods)

Market Commentary:

For Target companies, unvested stock price / total-shareholder return-based performance awards are more likely to be earned based on actual performance at time of close than based on target performance. Practice is more mixed for financial / strategic goals given the complexity of calculating performance results / outcomes for inflight plans.

– John Jenkins