What Is A Change In Control Severance Agreement


The transformation of control agreements, also known as “golden parachute agreements,” was born out of hostile acquisitions that began in the 1970s until the early 1990s. Amid friendly acquisitions in recent years, executives are now demanding protection for their continued employment, equity, deferred compensation and old-age pension in the event of a change of control. A crystal ball is clearly not effective in predicting the future, which is why leaders are calling for a change in control agreements to provide a degree of predictability for the future in exchange for increased risk. Companies regularly enter into these agreements in order to avoid the departure of executives during a change of control and to ensure continuity of management. (a) any “person” (as this clause is used in sections 13 (d) and 14 (d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with an agent or other fiduciary securities of the company as part of a performance plan for the company`s employees, becomes the “effective beneficiary” (in accordance with Rule 13d-3 , adopted under the Exchange Act), directly or indirectly, of shares of the company representing 50% or more of the outstanding common shares of the company or (B) of the combined voting force of the shares of the company then outstanding; Once the change in the control and trigger rules is completed, the gold parachute payment must be fixed. In 1984, Congress passed the Deficit Reduction Act as a tax fine in response to a period of intense corporate takeover activity, in which entrenched management teams used golden parachutes to maintain control. Senate Comm. on Finance, 98th Congress, Deficit Reduction Act of 1984, Explanation of Provisions Approved by the Committee on March 21, 1984. The Act created two new sections of the 280G internal income code, which does not allow deductions for excess parachute payments, and Section 4999, which applies a 20% excise duty to the executive for excess payments by parachute. The specific provisions of the two sections can be summarized as follows: a “parachute payment” is any payment to a “disqualified person” in the nature of the compensation, where that payment depends on a change of control of the company and the total value of all these payments equals or exceeds three times the “basic amount” of the individual. The basic amount is the average compensation of the person who is included in the gross income in the five years of taxation prior to the fiscal year in which the change of control occurs. An “oversupply payment” is any parachute payment greater than the portion of the base amount allocated to that payment. A “disqualified person” is any person who is an employee or contractor independent of a company and who is a public servant, shareholder or highly compensated person.


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