December 1, 2023
Handling Equity Awards in M&A Transactions
Cooley recently blogged about some of the challenges associated with navigating M&A executive comp issues in a volatile market. The first topic covered by the blog was how to deal with outstanding target equity awards. Typically, those awards are converted into buyer equity awards and new hires and incoming employees may also be granted additional awards. Since these transaction-related awards may deplete the buyer’s equity plan share reserve, buyers need to map out a strategy for handling them in the most effective way.
The blog discusses the pros and cons of alternative ways of dealing with target equity awards, including converting target awards into buyer awards, assuming the target’s unused share reserve, the use of inducement grants, and adoption of a new equity plan. This excerpt reviews the alternative of simply converting the target equity awards into buyer equity awards:
One option is to convert target equity awards into acquirer equity awards.
Advantages of this option:
– Stockholder approval is not required to convert, replace or adjust outstanding target equity awards to reflect the transaction.
– This exemption covers both assumptions and substitutions of target equity awards.
– Equity plans commonly address substitute awards and may explicitly provide that substitute awards do not count against the share reserve. (The buyer’s equity plan should be reviewed to confirm permissible treatment.)
Challenges of this option:
– The target equity plan should be reviewed to confirm that assumption and/or substitution are permitted actions.
– The buyer’s plan may provide that substitute awards count against the share reserve.
– While substituted or assumed awards may be excluded from the burn rate analysis used by proxy advisory firms, such awards will be considered as part of the overhang analysis in determining whether to support a subsequent equity plan proposal.
Other M&A comp-related topics addressed in the blog include aligning interests of investors, directors and employees, and disclosure issues relating to insiders’ interests in the transaction, say-on-parachute pay and, for private targets, a Section 280G vote.
– John Jenkins