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One critical issue for an acquiring company in any proposed merger or acquisition is how to retain executives and key employees of the target. The introduction of a third party-an acquirer-into an employer-employee relationship can stress its bonds to the snapping point and generate a variety of reasons for an executive to want to leave. Some executives with change-in-control agreements who can earn more money by leaving than by staying on with the new company will prefer to take the payout if they are not offered substantial financial and other incentives to remain. Other executives may balk at ceding their places in the corporate hierarchy in terms of salary or position. Opaque messages from the acquiring company regarding whether its top priority is to “maintain management continuity” or “achieve financial synergies” may baffle or antagonize personnel who otherwise would like to remain with the new company. For their part, acquiring companies may be frustrated by executives who want retention compensation and perks not required by their current contracts, and may be disinclined to negotiate those demands, even if they wish to keep the executives. Furthermore, the uncertainty caused by a change in command often raises trust and ego issues-often disguised as business issues-unanticipated by acquirers but as important to employees as compensation and organizational structure. The smartest acquiring companies recognize that a merger or acquisition is not all business, and that they must address in a concrete way both the legal and psychological issues accompanying a transaction to give the newly merged company its best chance for success. Companies commonly enter into change-in-control agreements with their executive officers to ensure that, if the company becomes an acquisition target, its executives are motivated to continue with the company through the change in control and financially protected if they will not have roles in the new organization. Such an agreement typically promises to pay the executive three times the executive’s highest annual compensation if he or she is terminated or walks away for good reason after a change in control. The agreement will also provide the executive with negotiating leverage by requiring the acquirer to pay the executive’s legal fees if it challenges the executive’s right to the severance payments. The executive may also receive a gross-up for the 20% excise taxes payable by the executive if he or she receives an excess parachute payment under Internal Revenue Code � 280G. Option plans, restricted stock plans and supplemental executive retirement plans will also provide for acceleration of vesting upon a change in control. Even though change-in-control agreements require executives actually to terminate employment to receive their severance pay, executives widely view severance pay as an entitlement. If they left, they would get lucrative severance packages, so why should they not get the same-or larger-amounts if they stay? Payment of severance to the executive who stays also strokes his or her ego because it demonstrates the acquirer’s understanding of the executive’s importance and functions as an extravagant emotional reassurance in an unstable work environment. Some acquirers will be frustrated by such reasoning and disinclined to allow these expectations to be realized but will nonetheless make half-hearted attempts to reach a middle ground, which only worsens the situation. For instance, if a company suggests a compromise whereby the acquirer will pay a target executive a limited sum of money if he or she stays with the new company for several years, the executive will feel he is losing his entitlement. The acquirer will not understand why its generous and creative offer receives a tepid response. Both parties will feel dissatisfied, resentful and distrustful. Straight talk No matter what is said, target personnel will be suspicious. An acquisition dissolves the emotional ties that bind executives to their company. It creates raw nerves. Employees intuitively know that the second-biggest lie after “the check is in the mail” is that “nothing will change in the merger.” Executives and employees know that things will change, and they want to hear straight, consistent talk from the acquirer about their future with the new company. If, instead, the acquirer’s priorities and procedures send a confusing or conflicting message to the target employees, they will be wary of the acquirer’s motives, and the atmosphere will be uneasy and at times contentious. Recognizing the need for trust building and sensitive treatment is particularly significant when it comes to the acquirer’s dealings with the target’s top executives. For instance, an acquirer should be straightforward with an executive it knows it does not wish to retain, to avoid the appearance of dissembling and to build trust with the target employees. It should also prepare itself to pay a good-faith premium for the executives it wants to keep. The tone that is set for those relations will filter down to the rest of the company. Two examples based on experience demonstrate these issues. In one merger, a chief executive officer of a target approached his counsel early in the negotiation process to ask if he could be forced to stay with the new company, pointing to a phrase in the expression of interest by the acquirer that conditioned the offer on the CEO staying on as a regional manager. From the acquirer’s perspective it was a compliment to the executive, but from the executive’s point of view, he had to leave or he could not collect the severance to which he felt he was entitled. Hearing the executive’s concern, his counsel suggested that his investment banker speak with the acquirer’s CEO about paying the severance amount even though the target executive would stay on. Without a word of complaint, the acquirer changed the indication of interest to provide just that incentive. The executive was also given a country club membership and was courted by the acquirer’s CEO, and the new regional manager sings the praises of the acquiring entity. In another merger, the acquirer wanted to keep several executives of the target company. For a variety of reasons, the target executives were paid their severance in a way to avoid a tax gross-up, and their restricted stock and option grants were accelerated. The acquirer agreed to keep the target executive salaries at the same level, even though this meant that the target executives would be earning more than some senior acquiring company executives. However, the management of the acquirer then decided to communicate to the target executives that they would not be eligible for raises. While the executives remained with the company after the closing, they were unsurprisingly not great cheerleaders for the acquirer. The need to listen To help retain both an executive and his or her goodwill, then, companies must suppress their instinct to enforce their legal rights to the letter and instead listen hard to determine what is most important to the executive. An acquirer may have to offer an executive sums not required by a change-in-control agreement, but the expenditure will both meet the executive’s economic and psychological needs and pave the way for a positive future relationship. If the acquirer fails to recognize and address these needs, the cost of finding a new executive may, in the long run, be more than the cost of satisfying the acquired executive’s expectations. The general counsel’s leadership can be instrumental in favorably resolving these issues. When a merger is contemplated, the general counsel of the acquiring company will be called upon to review the change-in-control and employment agreements of the senior executives of the target and offer advice about them. Applying an analytical approach, the general counsel will review the agreements to determine whether the acquirer can allow the executive to depart without owing him or her any severance, the cost of allowing the executive to depart with a contractually mandated severance payment, and whether a departing executive could be made to execute a noncompete agreement. If he or she only focuses on calculable economic elements, however, the GC may disserve the acquirer by neglecting the delicate but important intangibles that bind people into successful teams. “Thinking like a lawyer” in this context may alienate the good people who are often critical to the success of an acquisition because it disregards the simple truth that team members must feel satisfied, desired and listened to, and that acquisitions are hard transitions. In this situation, the GC would do best to advise the acquirer to follow the lead of the character Vincent Vega of Pulp Fiction fame. When asked, “Do you listen, or do you wait to talk?” he replies, “I admit I usually wait to talk. But I’m trying harder to listen.” Ronald H. Janis is a partner in the mergers and acquisitions group of Pitney Hardin and the managing partner of the firm’s New York office. Stacey Sabo is an associate in the transactions department of the firm’s New York office.

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