M & A Law Prof Blog

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. 

-bjmq

Valero adopts Say-on-Pay Policy

It's officially a trend!  In response to a say-on-pay campaign Valero announced yesterday that it was adopting a 'say-on-pay' policy joining Pfizer.  Apparently shareholders at more than 110 companies are considering say-on-pay resolutions this proxy season.

The say on pay proposals, which have increased in number and support since they were first introduced in 2006, are fueled by public outrage over executives who got big bonuses “at the same time their companies were losing lots of money,” said Tim Brennan, chief financial officer of the Boston-based Unitarian Universalist Association, which sponsored the say on pay resolution that Valero shareholders approved in April.

“Valero wasn't selected because we thought there was something egregious about their structure,” Brennan said. “But as a big, visible company, it's a company that could set an example in best practices in corporate governance.”

-bjmq

Pfizer gives shareholders "say-on-pay"

Pfizer is kind of forward-looking when it comes to these kinds of governance issues.  By that I mean - they get pushed, they resist, then they rethink their position.  Last time around they adopted a majority-voting policy very early on.  Now, it's say-on-pay.  Here's the release:

Pfizer Inc. announced that its Board of Directors has approved giving shareholders an advisory vote on executive compensation. The vote will first occur at Pfizer’s Annual Meeting of Shareholders in 2010 and will take place on a biennial basis thereafter.

“The Board’s action continues Pfizer’s long tradition of seeking and responding to shareholder input on compensation and other corporate governance topics,” said Matthew Lepore, Pfizer’s vice president and chief counsel for Corporate Governance. “The advisory vote is an additional means of obtaining feedback from our shareholders about executive compensation, which is set by the Compensation Committee of the Board and is designed to link pay with performance. This feedback will supplement our ongoing investor outreach activities on a broad range of corporate governance topics, which will not diminish with the adoption of this advisory vote.”

Timothy Smith, Senior Vice President Environment, Social and Governance Group for Walden Asset Management, and Stephen Viederman of The Christopher Reynolds Foundation said, “We commend Pfizer for taking this step. Once again, Pfizer has exhibited leadership in responding to investor concerns, a proactive approach to investor communications, and strong corporate governance.” The Christopher Reynolds Foundation sponsored a shareholder proposal regarding advisory votes on executive compensation at Pfizer’s 2009 Annual Meeting of Shareholders.

-bjmq

More Fuel for Shareholder Access Debate

The real question regarding the shareholder access debate is whether once shareholders have the power to nominate minority directors whether they will use it for good or ill, or at all.  Yair Listokin has a paper, “If You Give Shareholders Power, Do They Use It? An Empirical Analysis,” in which suggests the answer might be that they won’t use it at all.  Listokin looked at state antitakeover protection statutes that provide shareholders with the opportunity to opt-out through the adoption of shareholder initiated bylaw proposals.  He finds that very few companies’ shareholders take advantage of the opportunity to opt-out of these statutes.   This finding is consistent with earlier work from Rob Daines and Michael Klausner who looked at customization of incorporation documents and found very little opting out of default provisions (here). 

Recently, we started to have experience with shareholder votes relating to ‘say-on-pay’ a hot-button issue (and here) it there ever was one.   So far, shareholders who have had the opportunity to vote on pay packages appear reticent to say ‘no.’  The WSJ recently canvassed 15 companies large cap companies with say-on-pay policies that permit shareholders to review executive pay policies (here) and none of questions passed.  Given the high degree of emotion that pay questions can generate, the vote results (or lack of them) are pretty amazing.  All of this simply provides fuel for the shareholder access debate.

-bjmq