The Psychology of Triggers

I recently found myself in an interesting predicament. The predicament has to do with a relatively recent phenomenon associated with the merger and acquisition business. The phenomenon is commonly referred to as “change-of-control-triggers”.

The common element of such triggers are, as paraphrased from Business Week ”in the event you were terminated without cause or quit for good reason, that you were able to collect a certain amount of severance. The other point of such “triggers” is that regardless of whether or not they should accept the bid, shareholders don't want management distracted by from where the next paycheck will come.

One of the earliest cases of a payout related to a change in control was in 1979, when Reliance Electric was involved in takeover negotiations with Exxon. But it was at Bendix Corporation in 1982 that really got people's attention. Bendix launched a bid for Martin Marietta. Martin Marietta then made a hostile bid for Bendix. After that, Bendix ended up being acquired by Allied Corp.

In the course of this, the CEO of Bendix bailed out and took an expensive parachute with him. Congress then passed legislation that dictates that if you receive compensation of more than 2.99 times your annual pay, it should than be subject to a special excise tax. Now days, these agreements are more common. You now you have "single triggers" in which a change of control alone is enough to cause a payout.”

Single trigger language example: “In the event a Change in Control occurs , the vesting of each of the stock options to purchase shares of common stock of the Company set forth on Exhibit A hereto shall be accelerated in full, such that the Executive shall be entitled to exercise such stock options (in accordance with the exercise terms and conditions set forth in the option agreement and/or plan pursuant to which such stock options were granted) to the same extent as he would have been entitled had he been continuously employed by the Company until the end of the vesting period related to each such stock option.

"Change in Control" shall mean the consummation of any of the following events during the Employment Period: (i) a sale, lease or disposition of all or substantially all of the assets of the Company, or (ii) a sale, merger, consolidation, reorganization, recapitalization, sale of assets, stock purchase, contribution or other similar transaction (in a single transaction or a series of related transactions) of the Company with or into any other corporation or corporations or other entity, or any other corporate reorganization, where the stockholders of the Company immediately prior to such event do not retain (in substantially the same percentages) beneficial ownership, directly or indirectly, of more than fifty percent (50%) of the voting power of and interest in the successor entity or the entity that controls the successor entity, provided, however, that no Change in Control shall be deemed to have occurred due to the conversion or payment of any equity or debt instrument of the Company which is outstanding on the date hereof.”

My interest in the topic of triggers comes from first-hand experience. My company was recently acquired by another, larger company. It has provided me with a front row seat on the monetary and psychological impact of such triggers.

What’s interesting to me is the psychological impact of these “triggers”. It actually forces you to actively look for a position at a new company. Rather than preventing the executives from wondering where the next paycheck will come, there is a distinct financial advantage to leave. Even in the event that you like your job and would like to stay at the combined company.

Perhaps it’s overly socialistic of me, but I now believe that granting triggers to limited set of executives is counterproductive and actually hurts the transition and integration to the new company. Rather, if the CEO wants to ensure the continuity and integrity of the company during the acquisition, they should ensure that the stock option plan for all employees contains an consistent acceleration, say 25% of each employees holdings, regardless of the the rank of the employee.