Posted by Adam J. Shapiro and David E. Kahan, Wachtell, Lipton, Rosen & Katz, on Thursday, April 30, 2020 Editor's Note: Adam J. Shapiro and David E. Kahan are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton publication.

As companies seek to shore up their balance sheets, we expect to see an increase in private investments in public companies (often referred to as “PIPEs”). This post outlines key issues with respect to executive compensation arrangements that may arise in connection with PIPE transactions.

Review Applicable Change of Control Provisions. Parties to a PIPE transaction should carefully review target company compensation arrangements to determine whether the investment may constitute a change of control, and whether it can be structured in a manner that would avoid that result.

Share Acquisitions. The acquisition of a specified percentage of a company’s stock or voting power (often 20% or 30%) is a common change of control trigger in executive compensation arrangements. However, the share acquisition prong frequently excludes from the change of control definition acquisitions directly from a company. Assuming a plan includes a “direct investment” exception, a typical PIPE transaction would not constitute a change of control for purposes of the applicable arrangement. It is worth noting that the NYSE and Nasdaq generally require shareholder approval of issuances of company securities representing more than 20% of a company’s outstanding shares or voting power and that navigating these requirements may present additional complexity.

Board Changes. If a PIPE transaction involves a sufficiently large stake, the investor may negotiate company board representation in connection with the transaction. Typically, the board composition prong of a change of control definition requires a change in the majority of the board that is not approved by the incumbent directors. Because a PIPE investor’s board designees will typically be approved by the incumbent board and are not likely to represent a change in a majority of the board, a PIPE transaction is unlikely to activate the board change prong of a change of control provision.

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