A change in control agreement is a legal contract between an organization and a senior executive of the company which is drafted when a change of control takes place. These agreements are drafted to incentivize the employee to continue with the organization until a major sale, purchase or reorganization is complete.
Change of control essentially means there is a significant change in ownership. The exact nature of the change in ownership is mentioned in the agreement. The triggering events which lead to a change in ownership or board of director’s composition are set out clearly in the agreement. The options open to the senior executive at the point of change in control are mentioned including the details of the incentives for continuing with the company.
When do you Need Change in Control Agreement
A change in control agreement is required when a company wants to retain a senior executive during the change or possibility of change in control. The purpose of a change in control agreement is to lay down the detail’s incentives being offered to the senior executive to remain with the company.
As the senior executive plays an important role when it comes to strategic planning, their contribution during any major changes in the structure of the company make a difference to the future of the company. In the organizational structure, the CEO of the company is impacted much more than the other employees of the company.
Inclusions in Change in Control Agreement
A change in control agreement is a bipartite agreement between the employer and a senior executive of the company, hence the names of these two parties must be included in the agreement. It should include the effective date of the agreement, the triggering events which will lead to a change in control, the financial rewards payable to the employee, any limitations to the compensation payable to the employee and the specific period during which the benefit needs to be availed of by the employee.
There will be limitations to the number of occasions during which the change in control agreement may be exercised. There should be a provision for arbitration in the agreement.
How to Draft Change in Control Agreement
While drafting a change in control agreement the following points need to be kept in mind:
- The names of the parties to the agreement and the relationship between them should be defined
- The events which will constitute change of control will need to be clearly mentioned
- The employment period of the executive should be stated including the position and duties
- The compensation of the employee including the base salary, annual bonus, incentive, savings and retirement plan as well as welfare benefit plan, fringe benefits, office and support staff, vacation and termination of employment
- A non-competition clause should be incorporated where the senior executive will have to agree not to share any confidential information with any third party or competitor
- The governing laws of the state where the agreement is drafted
Benefits of Change in Control Agreement
The benefits of a change in control agreement are as follows:
- The employer is able to retain a senior executive by offering him certain incentives. Such employees play a key role during the sale or restructuring of the company and the employer stands to gain when the executive agrees to continue with the company
- The executive is offered a generous incentive which benefits them and they stand to gain by continuing with the organization
- The interest of both the company and the senior executive are protected with this agreement. The company is assured that there will be no dispute regarding the incentive offered to the executive as well as the performance of the executive. The executive is guaranteed the benefits offered in the agreement
Types of Change in Control Agreement
The types of change in control agreement are given below:
- Direct change in control: This type of agreement is drafted when there is a change in the controlling interest of the company. The beneficial owner gets more than 50% of the equity shares
- Indirect control: In case of indirect control, there is a change in the controlling interest in the subsidiary due to a change in control of the holding company. The reason for this is that the parent company has a change in ownership
- Contingent control agreement: The change of control agreement will be contingent on the happening of a certain event such as the controlling interest in the company is transferred to a competitor.
Key Terms in Change in Control Agreement
The key terms of a change in control agreement are as follows:
- Change in control period: The duration of the change in control agreements is given here
- Exempt person: An employee benefit plan of the company or subsidiary is defined here
- Events considered: The events which comprise a change in control are mentioned
- Employment period: The period of employment of the executive will be mentioned here, including retention payment, if any
- Position and duties: The designation of the executive and the duties to be performed are mentioned in detail
- Compensation: This will include the base salary, annual bonus, incentive, savings, retirement plan or welfare benefit plan
- Termination of employment: The circumstances leading to termination of employment is mentioned
When an employer wants to retain a key executive of a company, it is important to have a change in control agreement.
You can download a sample change in control agreement here.
Sample change in control agreement
Download this USA Attorney made Original Agreement for only $9.99
This agreement is made between Company and Senior Executive on the effective date of 13th November, 2011.
Company represented by
Mr. Wilson Jones
Address: 203 Alpha Street, Philipsburg MT 59858
Contact number: (406) 859-3631
Senior Executive represented by:
Mr. David Moore
Address: 237 Joliet Road, Columbus MT 59019
Contact number: (406) 578-0488
Terms and Conditions:
- This Change in Control Agreement will be active from the date thirteenth November, year 2011 and will continue to be in effect until the said executive’s Separation from the Service or Company within twelve months from the date of commencement of Change of Control.
- The company at any given time posts the enforcement of Change in Control Agreement and prior to the end of the Protection Period of the executive in question can transfer the executive’s primary site of work without any written consent from the executive on the date of amendment in the Change in Control Agreement.
- The Change in Control Agreement plan shall be enforced or administered by the Human Resources Team of the company and will be assisted by the Compensation Committee of the Board, provided, that none of the members of the Committee is a participant in the change in control plan.
- Change in Control Agreement cannot be enforced if the executive in question becomes the beneficial owner of more than 15% of the Voting Stock of the Corporation or Company.
IN WITNESS WHEREOF, the parties “Company” and “Senior Executive” have executed this Capital Accumulation Plan as on the date set forth which is 11/13/2011 (MM/DD/YY).
SIGNED FOR AND ON BEHALF OF COMPANY BY:
SIGNED FOR AND ON BEHALF OF SENIOR EXECUTIVE BY: