Corporate transactions are expected to increase as companies recover from the COVID-19 pandemic. In addition to full merger & acquisition activity, the market is likely to experience a variety of transaction types as companies rebuild and restructure for the post-pandemic economy.
A recent
article from law firm Foley & Lardner breaks down how the form of a corporate transaction is most likely to impact elements of employee benefits and executive compensation including existing benefits and compensation plans, transfer of employees and employment agreements, existing 401k plans, and equity awards. The article considers three transaction types: a full acquisition, an asset purchase transaction where specific assets and liabilities are purchased (but not the entire company), and a carve-out transaction of an operating subsidiary.
Full Acquisition:
- A full acquisition is effectively an “all or nothing” transaction, so anything the buyer does not want transferred will need to be terminated (employment agreements, equity awards, 401k, etc.) prior to the closing.
Asset Purchase:
- Many elements of benefits and equity incentives are considered assets and liabilities and they will be defined as such in the acquisition agreement. Their inclusion can impact the transaction costs. For example, employment agreements constitute a liability and may be reflected in the actual transaction value. Equity awards may become vested at the closing of the transaction or even cashed out; otherwise, when the employees terminate with the seller, they will likely forfeit any unvested equity awards.
Carveout:
- Carveout transactions generally do not transfer as many elements. For example, a 401k is most likely to remain with the former parent. However, for employees specifically, the transfer may be complex depending on which entity is the employer prior to closing the transaction: the subsidiary or the parent company. These elements often require more extensive transaction planning for carveouts. Equity awards will most likely be subject to change in control provisions depending on the details of the transaction.
The article makes it clear that the devil is in the details for how transactions impact employee benefits and executive compensation, especially in cases where a company is not being acquired in full. It presents a useful overview of some of the likely variables in each type of transaction, but each transaction will have unique characteristics that impact compensation and benefits differently.
