M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, May 1, 2007

TXU's Winner

It was disclosed in a Form 10K/A filing yesterday that TXU Corp. Chief Executive John Wilder will accrue compensation worth $279.6 million if the Texas power company's $32-billion purchase by Kohlberg Kravis Roberts & Co. and TPG is completed.  The compensation is mainly due to accelerated option vesting although it includes $2.5 million in cash severance, $60,000 in office-related services and $20,410 in health and welfare benefits.  NB. The Form 10K/A was remarkable for its long justification of Mr. Wilder's salary and change-of-control compensation and also disclosed, among other things, that his compensation for last year included $365,916 to install a security system at Mr. Wilder's Dallas home.  I wish I was so safe.

The disclosure is likely to add more fire to an already politicized acquisition (more details here).  But is it really too much?  According to TXU, the market capitalization of TXU has grown 224% during Wilder's tenure creating 10s of billions of dollars of value for shareholders.  TXU realized a 60% total return in 2005, but according to the Wall Street Journal returned only 11% last year.  It is still not decided whether Wilder will continue as CEO once the acquisition is completed -- if he is then this would make his change-of-control compensation more problematical due to his conflicted nature and double-dipping (this is Clear Channel's controversial problem). 

Disputes over change-of-control payments date from the 1980s and for those who want more on the theoretical justifications for these arrangements, I'll refer you to the following excellent comment from those days, Kenneth Johnson, Golden Parachutes and the Business Judgment Rule: Toward a Proper Standard of Review, 94 Yale L.J. 909 (1985) (there hasn't been much legal scholarship on this issue since then).  But, I'll also close by linking to a recent study which found that target shareholders tend to receive lower acquisition premia in transactions that involve extraordinary change of control payments for the CEO. 


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