Boardroom Briefing: Mergers & Acquisitions - Directors & Boards

Preventing Executive Compensation
from Derailing M&A Deals
By Ken Raskin and John Reiss
How to avoid common compensation pitfalls.
As every
director
knows—
particularly
with employee
stock option
backdating
dominating
the recent
Ken Raskin news—claims
of excessive
executive
compensation
often serve
as a lightning
rod for general
criticism of
corporations
and their
boards. In
John Reiss
a merger
or acquisition transaction, the
consequences of these allegations can
be even more immediate and acute.
These days, if a board is perceived as
approving overly opaque disclosures
of compensation packages or
“unreasonable” rewards to executives
in M&A transactions, the fallout can
include negative publicity, regulatory
investigations, shareholder unrest
and even scuttling of what would
otherwise be excellent transactions.
This can delay or obstruct crucial
business growth plans.
M&A activity soared to recent record
levels in 2005, and US and multinational
companies continued to
pursue M&A transactions at a very
brisk pace throughout 2006. At the
same time, shareholders, government
regulators and the media have
focused increasing attention on
executive compensation, including
compensation packages related
to M&A transactions. Powerful
institutional investors such as pension
plans, mutual funds and hedge funds
have withheld proxy votes to force
changes in certain M&A transactions
due to concerns over excessive
compensation. Government regulators
also entered the fray, with proposals
for new compensation disclosure rules
and corporate investigations.
If your organization plans to
participate in a major transaction—
whether as a buyer or seller—basic
precautions can help you steer clear of
some common pitfalls.
The Latest Hot Topic:
Stock Option Backdating
Stock option “backdating” cases
form the latest series of highprofile
executive compensation
scandals to hit the corporate world.
Backdating occurs when a company
sets employee stock option exercise
prices as of a date prior to the
board meeting in which they were
awarded. A growing number of
corporations have become the targets
of federal investigations and received
widespread media coverage based
on allegations that they backdated
stock options to increase executives’
pay illegally. The SEC, IRS and US
Department of Justice have recently
established task forces to review
whether companies backdated
Before pursuing M&A transactions, directors should
work with legal counsel to make sure all of their
corporation’s previous option grants have been dated,
disclosed and accounted for properly.
stock option awards in violation of
applicable laws.
Before pursuing M&A transactions,
directors should work with legal
counsel to make sure all of their
corporation’s previous option grants
have been dated, disclosed and
accounted for properly. Review of
stock option grants should be an
important part of pre-acquisition due
diligence to avoid assuming liability
for another company’s grant practices
inadvertently. Boards should also be
cautious about granting new options
soon before a company plans to
announce positive news that may
increase share prices—such as a
merger or acquisition.
Despite significant publicity about
the pitfalls associated with stock
option backdating, the M&A market
appears to be learning how to assess
these new risks and factor them into
transaction negotiations. At least two
corporations have already announced
agreements to acquire technology
companies subject to backdating
3 6 B o a r d r o o m B r i e f i n g : M e r g e r s & A c q u i s i t i o n s