Guest Blogger: Reading the "Footnotes" of Change in Control (CIC) Agreements
In legal writing, footnotes are seen either as a necessary evil, or just evil. After all, the "devil is in the details". (Insert, additional cliches here.) SEC filings are notorious for their use in an attempt to "inform" the public.
Luckily for all of us, there is one blog that is dedicated to reading the footnotes of such filings, and everything else in between. The blog, Footnoted.org, has been providing such information for close to five years now and has been recognized by many many business publications as one of the best business blogs out there.
Their history is aptly stated on their site:
footnoted.org was launched in August 2003... to coincide with the publication of the book, Financial Fine Print. Each day, the site takes a closer look at the things that companies try to bury in their routine SEC filings. Some posts are simply quirky little factoids (like the fact that Warren Buffett’s son relies on ConAgra for his health insurance) while others tend to focus on more serious issues, like aggressive accounting, excessive compensation or the type of questionable self dealing that can often be indicative of more serious problems at a company.
Today's guest blogger is Wendy Fried, a contributing editor to Footnoted.org. And even better, she another blog as well, Proxyland, that talks about corporate governance and "other oxymorons".
If you haven't taken a look at these sites, you really are missing out on some very informative items. (If you've been reading from the beginning, you would've caught my earlier post about them.) I'm very grateful for Wendy's post today. Today, she talks about Change in Control Agreements (which are basically agreements that are put in place for higher-level employees as "protection" for a sale or merger of the company). Wendy has her own thoughts and take on it (as with all of guest bloggers, the views expressed are hers):
I know this is bizarre, but I’m fascinated by the “whereas” clauses and “recitals” found in many change in control (CIC) agreements.
According to these clauses, which read like exercises in lawyerly psychobabble, the purpose of CIC agreements is to keep executives from becoming “distracted.” I don’t know whether any shrinks have studied this issue, but apparently top managers turn scatterbrained the moment a prospective acquirer darkens the corporate doorway. Whether or not such distraction is “inevitable,” as so many of these contracts proclaim, the cure is accepted: guarantee everyone big bucks in advance.
Here are a couple of formulations of this Distraction Principle, picked up randomly from recent SEC filings:
Do Not Disturb: “The Board of Directors…has determined that it is appropriate to reinforce the continued attention and dedication of certain members of the Company’s management, including Executive, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a Change in Control of the Company.” (Targeted Genetics Corporation. contract with H. Stewart Parker.)
Uncertainty Sucks: “The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company in the event of any threatened or pending Change of Control.” (Triumph Group, Inc. contract with Richard C. Ill.)
It’s amusing that highly paid executives receive extraordinary incentives merely to focus on their work in the face of job insecurity — a phenomenon faced by, like, hello, the vast majority of American workers these days. Distraction is part of life, anyway; I myself have recently been distracted by (1) the imminent collapse of our financial system, (2) the semi-annual Barney’s Warehouse Sale, and (3) a sock with worn-out elastic that keeps slipping into the heel of my left boot.
Of course, behind this psychological mumbo-jumbo lives a reality, called We Can’t Have Everyone in Management Out Looking for Another Job Whenever There’s a Potential Merger. Retention of key folks during merger negotiations can indeed be a valid concern, and seems like a more palatable justification for CIC deals than all this amateur psychology. Here’s one example of a “whereas” clause from a recent filing that uses this reasoning:
It is expected that the Company from time to time will consider the possibility of a Change of Control. The Board of Directors of the Company (the “Board”) recognizes that such consideration can be a distraction to Employee and can cause Employee to consider alternative employment opportunities… The Board believes that it is in the best interests of the Company and its stockholders to provide Employee with an incentive to continue Employee’s employment and to maximize the value of the Company upon a Change of Control for the benefit of its stockholders.” (Foxhollow Technologies, Inc. contract with John B. Simpson.)
If distraction is truly the issue, what’s wrong with Ritalin? It’s certainly cheaper than your average change of control payout.
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1. Suppose that a client asks for a copy of the latest executive employment agreements. Did you know that major corporations are required to file many of those agreements agreements with the SEC and are available for free? In other words, you too can review contracts that were done by attorneys at all the largest US lawfirms. One excellent (if slightly outdated) resource that compiles such SEC filings is 
On Friday, a new blogger for Footnoted, 
