M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, December 2, 2009

Golden Parachute Waivers

You'll remember that early last month Burlington Northern announced that Buffet's Berkshire Hathaway  would acquire the balance of BNSF's stock that it did not already own.  Recently reported that the CEO of Burlington Northern Santa Fe waived his rights to compensation under the company's change of control agreement/golden parachute.  

In general, seeing incumbent management waive their rights like this is a sign that the buyer and seller's management have a reasonably high level of confidence that the deal will work out well over the long term for both sides.  Sometimes "working out well" involves a lucrative new contract for management.  This case appears to be following Buffet's typical M.O. of buying strong management teams and leaving them in place to continue to run the business.  So, it's not really a surprise that the CEO would waive his rights under the change of control agreement. 

A copy of Burlington's form of change in control agreement is on file with the SEC.  It's a double trigger - a termination for other than cause following a change in control.  Here's the relevant language:

 If (x) your Date of Termination (or the date of delivery of the applicable Notice of Termination) occurs during the Agreement Term and is coincident with or follows the occurrence of a Change in Control [ed: up to a period 24 months following a change in control] or (y) if you have a disability during the Agreement Term after the occurrence of a Change in Control, then you shall be eligible for payments and benefits in accordance with, and to the extent provided by, Section 4, with such eligibility determined on the basis for your termination of employment. 

Payments are also due in the event the employee resigns for "good reason" following a change in control.  Good reason includes the typical list of things like diminution of duties, salary, forced relocation beyond 50 miles, failure to pay salary and bonuses, failure to continue to provide benefits, etc. 

The payments due under the contract are set equal to 2.5 times the highest 12 month salary over the previous 24 months (including deferred comp) and 2.5 times the targeted bonus for the current year.  Of course, it goes without saying that the agreement provides for continuation of health insurance benefits for 24 months for the terminated employee under COBRA.   Premiums to be paid by the company.  To the extent there are tax implications - "parachute taxes" that are raised by payments under this agreement, the covered employee will be eligible for a tax gross-up payment as well.  

What?  Your employer doesn't pay your COBRA premiums and make gross-up payments to you? 

Before I get too worked up, it's worth remembering the purpose of the Golden Parachute/Change of Control Agreement.  In general, we want senior managers not to recoil in fear at the first sign of a takeover.  Indeed, we'd like to create incentives for senior managers to be open to the possibility of being acquired.  During the takeover boom of the 1980s that generated so much of the takeover case-law we now have, incumbent management fighting off potential acquirers was the constant theme.  That particular theme has since receded from view, in part because the prevalence of change of control agreements has made senior managers more open to the prospect of losing their jobs.  

The fact that Burlington Northern's CEO has waived his right to payments under the change of control agreement suggests that he is happy with the new boss and not likely going anywhere.  That's a good thing. 



Executive Compensation | Permalink

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