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Stock Option Awards and Severance Policies: Key Considerations in Mergers and Acquisitions

As companies navigate the complex landscape of mergers and acquisitions, it’s essential to understand the implications of stock option awards and severance policies on both employees and the acquiring company.

Understanding the Implications

According to recent reports, a significant number of companies are failing to properly address these issues, leading to potential legal and financial consequences. In this article, we’ll explore the key considerations and best practices for handling stock option awards and severance policies in M&As.

Successor Employer Provisions

In Canada, statutory “successor employer” provisions ensure that employees’ employment continuity is preserved when a company is sold or acquired. However, there are exceptions to this rule, including prolonged breaks in service between the last day of employment with the acquired business and the first day of employment with the buyer.

Breaking the Chain

To “break the chain” of employment for non-statutory purposes, buyers must include enforceable written provisions in employment agreements or hiring letters. This is particularly important in non-unionized environments where employees are not protected by collective bargaining agreements.

Employment Agreements and Outstanding Claims

Buyers must carefully review all termination or severance-related obligations under employment agreements, hiring letters, and variable compensation plans. These obligations can be significant, especially considering Canada’s “reasonable notice” concept.

Changing Terms of Employment

As a buyer of assets, it’s essential to understand that you have significant control over terms of employment at the point of re-hiring. However, buyers of shares do not have automatic rights to alter terms of employment after closing.

Pensions and Benefits

Existing pension and benefit entitlements must be addressed in M&A transactions. Buyers should consult with their advisers at an early stage to consider these matters.

Distressed M&A

The buyer of a seriously financially distressed business faces unique challenges. In Canada, the use of “toe hold” distressed lending or investing can provide an initial advantage. Credit bidding is also becoming increasingly popular in Canadian court-supervised sale processes.

Conclusion

Stock option awards and severance policies are critical considerations in M&A transactions. By understanding these issues and implementing best practices, companies can mitigate potential legal and financial risks and ensure a smoother transition for employees and stakeholders alike.

Gowling WLG Services

For more information on mergers and acquisitions or to learn how Gowling WLG can assist you with your transaction needs, please visit our website or contact us directly.