A key consideration in merger transactions is retaining and incentivizing key employees. Individual employees are often the key assets of a business. It is easy to forgot this fact in the merger negotiation process, when the focus is often on the particular product and service offerings of each business.

There are a number of compensation tools that can be deployed to motivate key employees and encourage them to continue working at the combined company after the closing of the merger. Drastic changes to a company can cause uncertainty, and employees may start looking for other jobs between the signing and closing of a merger.

Between the signing and closing of a merger, a retention pool may be established. This retention pool will pay compensation awards to certain employees at the closing of the merger transaction and at specified intervals thereafter. New employment agreements may be negotiated between signing and closing a merger. Such employment agreements may contain non-compete clauses and other provisions intended to restrict key executives from seeking new jobs.

It is important that the parties in a merger negotiation carefully review the change-of-control provisions in existing compensation plans. This will provide insight into how different equity awards will be treated upon a change in control of the company.

Stock-based compensation equity awards are generally categorized as time-based or performance-based awards. Time-based equity awards may have “single-trigger” or “double-trigger” vesting provisions. An equity award with a “single-trigger” vesting provision only requires a change of control to accelerate the vesting of the awards. An equity award with a “double-trigger” vesting provision requires both a change of control and the involuntary termination of an employee to accelerate the vesting of the awards. When negotiating a merger agreement, the parties should have an intricate understanding of how these equity awards will be treated following the transaction. Double-trigger vesting provisions tend to be more common. In all-cash merger transactions, the parties may consider having all the existing equity awards fully vest and settle for cash payments regardless of whether the awards provide for double-trigger vesting.

For employees of lower seniority levels, a “tin parachute” may be used to provide enhanced severance benefits if the merger will result in layoffs. These enhanced severance benefits are usually limited to a period of 1-2 years after the closing of the merger.

A rabbi trust is an irrevocable trust used by companies to fund non-tax qualified benefit obligations for employees. Rabbi trusts are generally only used for executives and other senior-level employees. Companies can set aside funds in the rabbi trust to pay deferred compensation. Upon a change of control event, the acquirer company may remain under an obligation to continue to fund the rabbi trust. If the acquirer has more leverage in merger negotiations, the acquirer may try to amend its funding obligations under any existing rabbi trust agreements.

Another change-in-control protection that key executives may negotiate in connection with a merger is protection in the form of preserving the status quo. Under such arrangement, for a period of 1-2 years after the closing of the merger, the acquirer is required to maintain the status quo of the executive in terms of job responsibilities, job location, minimum expected pay, and certain employment benefits.