Here at Bank Director, we encourage readers to contact us with questions about issues they face as independent board members or members of management. We seek answers from experts and publish them for others in our membership program.
Our first question comes from a director of a privately owned Georgia bank:
“I am on the board of a local bank and the discussion involving change of control came up. We currently have a ‘double trigger’ regarding . . . key executives if a bank sale occurs. We have been counseled by our attorneys to change the document to a ‘single trigger’ in order to simplify the transaction and not put our executives in a difficult position of terminating in order to collect two or three times base earnings. What is the most common ‘trigger’ in banks today?”
So let’s retrace what the difference is: A single trigger is payment upon a change in control regardless of any change in employment status. A double trigger is payment upon a change in control followed by an involuntary termination of employment. Tips: Consider what constitutes a change in control, and consider the likelihood of the executive surviving the change in control. Consider position, age and the cost of severance to the deal. The trend today is double triggers; single triggers are out of favor.
Also, if this is a private bank, a single trigger may be worth considering IF it can get sound and enforceable non-compete and non-solicitation language signed by the departing executives. There is nothing worse than to give out a nice payment to executives—on behalf of the bank and its shareholders—only to see them set up shop “across the street” and begin competing and taking your people. Change-in-control monies have seeded more competition than most people would imagine, especially with banks!
—Brent M. Longnecker, chairman and CEO, Longnecker & Associates
Change-of-control protections can both ensure that executives provide an impartial consideration of strategic alternatives for a company without focusing on their own potential job loss, and serve as an effective retention tool for executives during uncertain times surrounding a potential transaction.
Executives are often eligible to receive enhanced severance benefits (typically a multiple of base salary and bonus) if their employment is involuntarily terminated (e.g., for cause or good reason) within a specified period following a transaction. In today’s market, there is minimal use of single trigger cash change in control payments, as they can undermine rather than foster the purposes noted above. Due to shareholder and shareholder advisor pressures, the use of single triggers for most types of change-in- control benefits has become fairly uncommon; however, notwithstanding plan design, equity awards may often accelerate at the time of a transaction, particularly in cash deals.
Some companies may elect to provide cash retention bonuses in lieu of, or in addition to, change-of- control severance benefits. Retention bonuses incentivize key individuals to remain with the company through the closing date or a specified milestone thereafter, and are also typically paid out on an involuntary termination prior to the payment date. The amount of any severance and other change-in- control benefits should be taken into consideration when determining retention bonuses.
—Doreen E. Lilienfeld, partner, executive compensation and employee benefits, Shearman & Sterling LLP