Change Of Control Definition Agreement How It Works

Change of Control Definition

Explanation

Venture capitalVenture CapitalVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more investors invest in companies that are at the initial stage: –

They provide funding and impose control over the management.The venture capitalist sells its stake to a private equity firm Private Equity FirmPrivate equity firms are investment managers who invest in many corporations’ private equities using various strategies such as leveraged buyouts, growth capital, and venture capital. The top private equity firms include Apollo Global Management LLC, Blackstone Group LP, Carlyle Group, and KKR & Company LP.read more when the company grows and the product begins to gain popularity in the market. So, this is a change of control.The private equity firm will provide capital to grow the company further.When the company reaches a steady state, the private equity firm will either sell it to another private equity or make it public.

So, like this, a change of control occurs in several steps.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Change of Control (wallstreetmojo.com)

Example

In 2008, Emami acquired a controlling stake in Zandu from Vaidyas at ₹6,900 per share. The bidding went on for several months and is considered the biggest hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more in INDIA. In the end, ₹750 crore was the consideration paid by Emami for a 72% stake in the company. So, a change of control occurred, and Emami controlled Zandu.

Change of Control Agreement

Several agreements may apply to the management of the company.

Golden Parachute: It mostly happens that the company’s new controller does not want the existing management to continue. So, the golden parachuteGolden ParachuteGolden parachute refers to the clause in the employment contract whereby the top-level executives entitled to receive significant benefits if the company faces a merger or takeover. Such benefits comprise liberal severance pay, cash bonus, retirement packages, stock options, etc.read more is an agreement to give top executives a hefty bonus for their termination from the company. These bonuses help top executives plan their early retirement or fund future endeavors.At times, the existing management may not feel comfortable working with the new controller, so they may want to quit. On the other hand, suppose the current administration is necessary for the operation. In that case, the change in the control agreement may incentivize the existing regime to stay in the company and perform functions. So, this agreement helps to motivate the current management to continue with their daily operations without getting demotivated.Change of Control Payment Agreement is an agreement that entitles the existing regime to receive a payment if any “change of control” occurs during the administration’s tenure. So, the administration will receive a lump sum during his tenure. The compensation can be in cash, shares, or stock optionsStock OptionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read more. It helps management work wholeheartedly without fearing being empty-handed in such a case.

Change of Control Clause

This clause gives certain rights to a party (such as consent, payment, or termination) if there is a change in ownership or control of an organization. It is a provision in the agreement of change in control. Not all of this control will trigger this provision. For example, there could be specific criteria for the change in management if another company acquires more than 50% stake in a company, maybe sell off most of the company’s assets to a third party, or maximum board members change.When triggered, the existing management can ask for payment or quit the organization.

When triggered, the existing management can ask for payment or quit the organization.

Advantages

The new management may have more significant expertise in handling business operationsOperations Of The BusinessBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more. The new management’s knowledge can help others operate the project efficiently.Communication with the employees may increase if the previous regime is ineffective.The new controller may have the vision to help the organization achieve new heights. The new controller may change the product line and reach areas in more demand.They can boost the morale of employees from the new controller if he has past proven records of good leadership.

Conclusion

Change of control is common throughout the world. And saw that companies have benefited from a change in control. If the new controller is visionary and plans to move forward, it will help.