Corporate Reorganization

In today’s business world, the phrase “corporate reorganization” is becoming more and more common due in part to the countless number of mergers, asset sales, spin-offs and the like. While the impact of such events on the workplace status quo often varies from case to case, any change in control has the potential to raise issues concerning how the new entity in control plans on handling the previous controlling entity’s employees. This not only applies to the obvious, day-to-day facets of the job, such as terms, titles and responsibilities, but also to more complex issues concerning the treatment of contractual promises that had been made to the employees by the previous entity in control. For example, the old controlling entity may have made contractual promises to its employees planning for a potential change in control that the new controlling entities may be less than willing to live up to when such a change comes to fruition.

Do you think that your employer will respect your change in control provision? In Caffrey v. Four Oaks Bank & Trust Company, (No. 5:10-cv-00341-FL, E.D.N.C., 6/29/2011), the employer in control entered into employment contracts with two executives that contained lucrative severance provisions providing for payment following any change of control that lead to a materially adverse effect on the executives’ duties or benefits. After the employer announced a merger in which it would be taken over by a different company, the two executives were informed that they would be terminated by their new employer after the merger received the required regulatory approval. The merger – and the corresponding “change in control” – faced a lengthy regulatory review, not receiving the final approval until eight months after the merger was first announced. Less than three weeks before the approval was announced, however, the two executives were terminated and the old employer in control argued that it was not obligated to pay the severance benefits because there had yet to be the requisite “change in control” as contemplated in the employment contracts.

Is your change in control provision triggered? In Caffrey, when the executives brought suit in federal court to enforce the agreements against the new controlling entity, the court agreed with the employer that the severance provisions were not triggered. The court determined that a “change in control” contemplates a substitution or replacement of the governing body; thus there had been no such change in this case as the merger had not been completed prior to the executives being terminated. The court reached this conclusion despite the fact that the merger had been announced and the new entity had previously made its intentions to terminate the executives known.

Take Action Both Prior to and After Announced Changes in Control. This case highlights the need for executives and individuals to be diligent in planning for potential changes in control and in acting both prior to and after any announced change in control taking effect. It is equally as important to remember that a court may, as in Caffrey, enforce the contract according to form instead of substance and, as a result, apparently broad protection in an employment contract in the event of a “change of control” might provide no protection at all until the actual merger, asset sale or spin-off has been completed, as opposed to merely announced.

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