Exchange-in-control agreements, sometimes referred to as “golden parachutes,” compensate executives for job losses due to mergers or sales. Executives are agents charged with acting in the best interests of the company and shareholders. However, CEOs face difficulties associated with merging or selling the company, the end result of which will result in the loss of his position as an executive. Exchange-in-control agreements are structured to encourage executives to seek and open up opportunities for sale or mergers if it is in the interests of shareholders, without hesitation in losing their own positions. While negotiating a tax-friendly amendment agreement can be an important part of your employment agreement, you may need the help of experienced legal counsel to help you understand your options and overcome objections from a board of directors or other authority. If the structure is correct, a change in the control agreement can avoid tax and securities pitfalls and provide you with significant compensation, benefits and safeguards over a desired period of time. Parachute gold payments are triggered in one of three ways, and each is triggered by specific changes in control events. There is the “only trigger” where the manager voluntarily resigns in his spare time and demands payment. The individual trigger favours the executive because of the automatic nature of the change in the definition of control, i.e. it is financially protected. Management is less concerned about the future of the company after a change of control and, depending on the language of the contract, the manager may be reinstated the next day. In the event of a breach of contract in the parachute contract, a federal law offers additional protection beyond the ordinary right of the contracts, as stipulated in the contract`s choice provision.
These agreements are generally governed by the Employee Income Security Act (ERISA), 29 U.S.C. ERISA considers the modification of the control agreements as a social protection plan for workers: in order to seize the ERISA fiduciary scheme, the executive must first find that the modification of the control agreement is a welfare plan. A “plan under ERISA is established where a sensible person is able to identify the benefits envisaged   from the circumstances where a class of beneficiaries,  a source of funding and  benefit collection procedures.” Purser v. ENRON Corp., 1988 WL 220238 at 3 (W.D.Pa.1988). Once the change in the control and trigger rules is completed, the gold parachute payment must be fixed. In 1984, Congress passed the Deficit Reduction Act as a tax fine in response to a period of intense corporate takeover activity, in which entrenched management teams used golden parachutes to maintain control. Senate Comm. on Finance, 98th Congress, Deficit Reduction Act of 1984, Explanation of Provisions Approved by the Committee on March 21, 1984. The Act created two new sections of the 280G internal income code, which does not allow deductions for excess parachute payments, and Section 4999, which applies a 20% excise duty to the executive for excess payments by parachute. The specific provisions of the two sections can be summarized as follows: a “parachute payment” is any payment to a “disqualified person” in the nature of the compensation, where that payment depends on a change of control of the company and the total value of all these payments equals or exceeds three times the “basic amount” of the individual. The basic amount is the average compensation of the person who is included in the gross income in the five years of taxation prior to the fiscal year in which the change of control occurs. An “oversupply payment” is any parachute payment greater than the portion of the base amount allocated to that payment.