Many executives of publicly held utility corporations have written severance agreements to protect them in the event of a change in control. However, these severance packages remain vulnerable to attack by acquirers.
Two separate threats are emerging. One involves a direct attack on drafting flaws in the plan documents. The other, more subtle, threat lies in the impact and interpretation of the special "Golden Parachute" rules under the Internal Revenue Code. This second threat warrants attention.
Many severance agreements include lump-sum payments, plus added pension service credit, immediate vesting of stock options, and continued health and life insurance. These benefits could trigger the golden parachute rules, invoking substantial penalties payable out of severance benefits following a change in company ownership. In addition, an acquirer may be able to reduce or eliminate various benefits to avoid making a "parachute payment."
Golden Parachute Rules
The "Golden Parachute" rules can impose penalties against either the acquirer or the outgoing executive, depending on the circumstances. In general, these penalties arise if the value of the severance benefits triggered by a change in control exceeds 2.99 times the executive's average annual compensation during the previous five-year period. If benefits exceed this limit, all severance benefits triggered by the change in control become "parachute payments." Under section 4999 of the Internal Revenue Code, executives must pay a 20-percent nondeductible excise tax on the amount of the "parachute payments" that exceed their five-year average annual compensation. Further, section 280G states that the acquirer cannot deduct these so-called "excess parachute payments."