How Change In Control Can Impact Personal Financial and Tax Planning

Markus had been recruited out of business school by the Pharma giant and has thrived in every way. Now the Vice President of Global Strategy, he has been rewarded for his work and risen through the ranks over 20 years. He is happily out of step with his business school peers who are working for their second or third company by age 40. He is dedicated to the Company and proud to have bucked the trend and stayed the course. Now that a good part of his compensation is awarded in performance shares, the future seems bright.

That is why he feels a bit unmoored by the news that his company is splitting into two companies by the end of the year. He agrees with the strategy; however, there’s a good chance his company will be spun out, separate and distinct as a new public company. He and his division management peers will form a new company, leaving friends and colleagues, core services and familiar resources out of their reach. Fortunately, his job is secure, and he can remain in his current role in the new organization. But the move raises more questions than answers.

Change in Control

Change in Control -- an all-too-frequent concern of long-term corporate executives -- is triggered by a material change in a Company’s ownership through events such as consolidation, reorganization, separation or other transactions. In Markus’ case, the Company is separating voluntarily and for well-considered reasons. He wonders what else is triggered by the Change in Control?

His personal wealth includes a treasure trove of Company stock. His long-term incentives are an important source of financial well-being. Everything from health plans, company benefits and pension plans bear the Company’s name and could be subject to modification. How will the changes in benefits be handled and over what period of time?

Taxable Event Potential

Markus knows from company acquisitions that, when it comes to LTI awards, the Company may cash out, assume, convert or cancel awards. He doesn’t see there would be an advantage for the Company to cash out. That option would not provide an incentive for him to stay. He expects the split will create some kind a taxable event, whether through accelerated vesting or some sort of retention award.

For example, will his performance awards “cliff vest” at the close of the transaction with immediate tax implications? Or will his performance awards be converted with modified performance criteria?

Will the Company ask Markus to modify his existing agreements and restart the vesting period? This would push back his tax timeline and potentially his wealth event.

What about his benefits? Will the Company modify his pension benefit, medical benefit, 401(k) and other group benefits?

Asking the Right Questions

Markus wants to be fully prepared and anticipate the personal impacts before the transaction closes at the end of the year. The Company is ramping up internal communications; however, there are many unanswered questions. The bottom line is this: Markus wants to know if he will be taking a step back or a step forward on his path to achieving financial independence. He reaches out to SFG to learn from their experience with similar transactions and the impact on LTI. He wants to take steps to optimize his financial position amid the sea of unknowns, and prepare to ask the right questions to protect his financial well-being.

*The name, likeness, and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients.

Executive Compensation, Non-Qualified Deferred Compensation, Restricted Stock Units, Retirement Planning, Stock Options

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