As discussed in previous posts written by my colleagues
Victoria Riley and
Sara Josselyn, key talent retention is an important
consideration for parties to a proposed M&A transaction. The
uncertainty of a potential transaction may cause key employees to
seek work elsewhere, which could in turn, jeopardize the deal
itself. A change-in-control (CIC) severance
agreement, however, is one mechanism that can be used by companies
to allay concerns and prevent key talent departures.
CIC severance offers enhanced severance to key employees upon a
change-in-control. The agreement must define what would constitute
a "change-in-control". Although this definition is often
drafted to include a merger, hostile takeover (either through share
purchases or through a proxy battle) and liquidation, when
drafting, it is important to carefully consider context rather than
rely solely on precedent, as the definition can, in certain
circumstances, be highly fact-specific. Enhanced severance payments
would be owed either upon a single trigger (meaning the occurrence
of the CIC event alone) or a double trigger (meaning the occurrence
of the CIC event plus a qualified termination, excluding
termination for cause). A double trigger is the typical arrangement
and aligns with what the Canadian Coalition for Good Governance (CCGG)
advises. According to Meridian Compensation Partners a standard
severance amount is 2-3x pay for a CEO and 1-2x pay for other
senior executives, pay being inclusive of salary and bonus.
CIC severance also provides a cost advantage in comparison to
other methods used by companies to retain key talent, namely
retention bonuses. Retention bonuses offer cash bonuses to
employees who stay for a given period of time after a deal is
completed. As stated in this article written by Towers Watson, whereas
retention bonuses are automatically awarded to all key talent who
remain for the given time period as prescribed under the
arrangement, CIC severance, presuming there is a double trigger, is
only awarded to those key employees who are terminated after the
CIC event. As a result, CIC severance may not be awarded at
It is recommended that a proactive approach be taken by
companies when it comes to CIC severance so as not to jeopardize
the deal and to avoid conflicts of interest during an M&A
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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