September 09, 2008

Former Officer Receives Change-in-Control Bonanza: Zebeck v. Metris Cos.

It was an outcome few familiar with change-in-control agreements would have predicted: a $42.7 million judgment under a change-in-control agreement to a former CEO who had been terminated by the company three years before the sale of the company. Typically change-in-control agreements are adopted in order to ensure continuity of management and management cooperation in the face of a rumored, threatened or solicited takeover. The plaintiff in this case was terminated on December 15, 2002, ostensibly because the company was performing poorly. The company eventually was sold in 2005. The only event relating to a possible change-in-control that had occurred during the former CEO's employment was that the company had hired investment bankers to advise the company on financial alternatives, which could have included a sale. Nonetheless, the jury found for the former CEO and awarded him $30,211,716 under his change-in-control agreement, and the judge awarded him an additional $11,563,454.33 in attorneys' fees and costs. The Minnesota appeals court then affirmed. (See 2008 Minn. App. Unpub. LEXIS 608 (Minn. App. May 27, 2008).) The real problem for the company? The language used in the change-in-control agreement to describe the events that triggered a change-in-control payment was vague, and had no time limits. So, the jury was left to determine whether the former CEO's 2002 termination had been "in anticipation of" the change in control that occurred in 2005. Comparable language is fairly common in change-in-control agreements in use these days. To avoid an unexpected outcome, companies might want to more precisely define the events that trigger a change-in-control payment.

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