In the context of a friendly public offer, the bidder (as prospective shareholder of the target in case of a successful offer) will usually seek to enter into a transaction agreement with the target. Such a transaction agreement customarily includes provisions regarding the continuance of the contractual relationship between the target and its management, as well as the (dis)continuance of certain target board members' mandates as per the settlement of the public offer. By the same token, voluntary public offers often contain a condition obliging the bidder to be bound to its offer that:
- all or certain members of the board of the target and its subsidiaries will have resigned from their functions on settlement of the offer;
- a general meeting of target shareholders will have been held and individuals will have been nominated by the bidder and elected to the target's board with effect as from the settlement; and
- the remaining board members will have entered into (and not subsequently terminated) a mandate agreement with the bidder with effect as from the settlement.
Given the inherent agency problem in the context of a potential takeover of a target, it goes without saying that the target's board has a vital interest in seeking certainty with regard to any of its equity incentive arrangements (eg, unvested options and similar arrangements) in a public takeover or change of control scenario. In particular, concessions for large-scale severance payments, in case of an early termination of the mandate, were not uncommon before the enactment of the Ordinance Against Excessive Compensation with respect to Listed Stock Corporations in January 2014. This applies to Swiss companies listed on a Swiss or foreign stock exchange, providing for enhanced corporate governance rules and the control of shareholders on the remuneration of board members and company executives.
Any remuneration of the board or executive management of a listed entity is subject to (annual) approval at its shareholders' meeting. As of January 1 2016, Swiss-listed companies must comply according to the applicable transitional provisions of the ordinance and, to this effect, must implement the necessary changes to their corporate governance documents and reporting information. Therefore, these companies have had to adopt a resolution on such adjustments of the articles of association at the annual shareholders' meetings in 2014 or 2015. Besides provisions regulating the compensation for board members in general – and the requirement that the shareholders of a listed company have a say in the compensation of the target's board and executive management – the ordinance restricts certain types of compensation to the executive management and board which come into play in the case of a public takeover.
In particular, sign-on bonuses (known as 'golden handshakes') and severance payments (known as 'golden parachutes') are disallowed, to the extent that they are not owed to an executive leaving as a consequence of a judgment or do not accrue during the termination period or during the remainder of a fixed-term employment. By the same token, such notice periods or fixed-term employment agreements should not exceed 12 months.
However, it is still permitted to reimburse an executive for compliance with a post-contractual non-compete obligation, which may have effects similar to a golden parachute. On the other hand, sign-on bonuses will continue to be valid as long as, for example, they compensate for the forfeiture of non-vested interests in share and option plans of the former employer (for further details please see "Relevance of Minder Initiative to M&A transactions").
Should a bidder wish to address topics related to compensation of members of the target's board of directors, advisory board or executive management within the framework of a public takeover, it must be assessed carefully as to whether such payments (eg, consideration paid in order to retain employees during the acquisition process, time vested or performance vested with regard to executive participation schemes) are in line with the ordinance.
In order to assess the admissibility of compensation for non-competiting undertakings, these will have to be measured against market benchmarks. Similarly, executive investment schemes providing for an accelerated vesting in the case of a public takeover should remain permissible, to the extent that the compensation received by the respective board and executive members does not exceed the remuneration which would have been received at a later point. However, if the vesting has the economic effect that the remuneration of the member of the target's board or executive management increases as a result of early resignation or termination, such compensation must be examined closely.
For further information on this topic please contact Alexander Vogel or Samuel Ljubicic at Meyerlustenberger Lachenal by telephone (+41 44 396 91 91) or email (email@example.com or firstname.lastname@example.org). The Meyerlustenberger Lachenal website can be accessed at www.mll-legal.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.