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New Primer on Executive Compensation and M&A Transactions

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Authors: Ani Huang

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A recent “Practical Guidance Practice Note” from Mayer Brown’s Debra Hoffman on executive compensation in corporate transactions provides a comprehensive and updated overview of all the considerations related to executive pay that might arise during M&A. Although the note is intended for lawyers, it is a valuable summary for anyone who is new to M&A and executive compensation (and even perhaps those who are experienced). Highlights of the 17-page primer include:
  • Due Diligence. This should include a review of change-in-control and severance provisions, a variety of executive compensation filings (the practice note helpfully provides descriptions of all of these), and common executive compensation provisions in transaction documents.
  • Section 280G Payments. The article provides an excellent overview of the types of payments that involve excess parachute excise tax and how to reduce or avoid such payments, such as the “best net” method where executives receive the better of the full payment minus excise tax or a reduced payment that doesn’t trigger excise tax.
  • Section 409A Compliance. As Section 409A violations have enormous tax implications for executives, ensuring compliance with this rule for any deferred payment (not just non-qualified deferred compensation plans but unintended severance payouts) is vital.
  • Section 162(m) Limitations. Transactions can alter the list of individuals who are “covered employees” for the purposes of 162(m) limitations on deductible pay. In addition, special rules apply for private companies that become public.
  • Equity Award Considerations. Along with the compliance considerations above, companies in a transaction must determine what will happen to outstanding equity awards, whether substitution of awards will take place or awards will be cancelled, and how performance metrics, share reserves, and disclosure will be handled. 
Although the above may seem complex, the potential for error in M&A transactions is high, necessitating a broad understanding of the myriad issues in play. For a more high-level review of compensation implications during a transaction, including examples of merger-related compensation arrangements, see CAP’s article here.

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