A change of control agreement may be exercised either where the employee quits, or
where the employer elects to dismiss the
employee (without cause). In this way, it
confers benefits to both parties. A typical
agreement will set out that if the business
undergoes a change of control, an employee
will have a certain number of months in which
they may choose to resign, and the company
will pay the employee a lump sum equivalent
to a specified number of months of the employee’s base salary at the time the change of
control occurred, in addition to any severance.
The agreement will typically go on to provide
for the same lump-sum payment should the
employer be the party that wishes to terminate
the employment relationship.
For the employer, a change of control agreement also provides senior executives with an
incentive to remain loyal to the business at a
time of uncertainty and vulnerability. A change
of control agreement is typically found in the
written employment contracts of senior management employees because of the unique
role these executives play within the business,
including their roles in strategic planning.
Often such employees will be directly involved
in the sale or transfer of the business that is
contemplated by a change of control agreement. A CEO or a CFO will be more directly
affected by a change of control of a business
than other employees.
In Montreal Trust Co. of Canada v. Call-Net
Enterprises Inc. (2002),1 the Ontario Superior
Court called the change of control agreement
a “protective mechanism” for the business that
promotes the retention of top executives and
ensures their loyalty by providing a financial
benefit to them as the company undergoes a
significant change. In essence, the employee
has a financial reward if they continue on in
their employment until the sale has concluded.
Note: Where a company undergoes a change of control, the normal rules regarding entitlement
to notice do not apply, as the change of control provisions usually expressly supplant other
clauses regarding notice of termination.
A case study
Much of the litigation in the context of change of control agreements centres on whether or not
a change of control has actually occurred, and, subsequently, whether or not the employee is
entitled to the benefits and protections as defined in the agreement. These benefits may be substantial, so it is important to clearly identify the triggering events that will result in the employee
receiving them.
A recent Ontario case highlights the importance of a well-drafted change of control
agreement. In Fisher v. First Uranium Corporation,2 the plaintiff (a former employee) asserted
that certain changes in the membership of the business’s board of directors constituted a
change of control sufficient to trigger the change of control agreement, thus enabling him to
leave the company with his lump sum payment. Among other things, the agreement held that
a change of control would occur in the event that “the incumbent directors cease to represent
a majority of the members of the board.” Although both parties agreed that the board had
undergone changes, they disagreed that the composition had changed such that the incumbent
directors were no longer in the majority. After extensive analysis, the Ontario Superior Court
found that the plaintiff ’s position was not supported by the evidence.
Montreal Trust Co. of Canada v. Call-Net
1
Enterprises Inc., (2002) 57 OR (3d) 775
(ONSC).
Fisher v. First Uranium Corporation 2011
2
ONSC 7160.
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