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This Debevoise article discusses compensation issues unique to take-private transactions — a “darling” among PE sponsors in recent years. In addition to the application of Section 280G, required compensation disclosure, “say on parachute” shareholder vote and treatment of outstanding public company equity awards, the alert highlights the need to understand — and address — possible exposure to executives departing and invoking “good reason” clauses for seemingly small changes in reporting structures post-closing.

Public company executives frequently have employment agreements or change-in-control severance plans entitling them to severance or benefits if they resign for “good reason” following a change in control. Common triggers include material reductions in salary or benefits; a substantial diminishment of the executive’s title, authority, duties or responsibilities; or requirements to relocate beyond a set distance. Severance at public companies is typically generous and pegged to levels higher than private companies.

Changes at a target company that naturally occur as a result of a take-private transaction may provide C-suite executives with the ammunition they need to invoke their “good reason” clause. For example, a CFO losing public company financial reporting and investor relations duties might point to a perception of diminished responsibility as a basis to resign and collect severance. Even when such claims are not ultimately valid, the mere assertion of those claims can be disruptive and potentially expensive to resolve.

PE buyers can mitigate this risk by reviewing and renegotiating “good reason” provisions before closing. Executives may be asked to waive any potential triggers tied solely to the shift from public to private status so that it is clear the transaction itself does not automatically allow an executive to walk away with severance. These discussions will often occur in connection with the negotiation of post-closing equity and other compensation arrangements, subject to the timing and disclosure considerations discussed.

Did you know we have an “Executive Compensation” Practice Area with resources relating to compensation issues in M&A (like this alert)? Check it out for more!

– Meredith Ervine