The most critical issues when negotiating a severance agreement or arrangement with a key employee are: the description of the event(s) that will trigger payment, as well as the tax implications of these arrangements to both the buyer or seller and the employee in question. The size of the payment can range from a portion of the employee’s annual salary to a multiple of his annual salary and bonus.
There are three types of triggers that will lead to a payment: a single trigger, double trigger and modified double trigger.
Single trigger: the employee receives payment when 1) there is a change of control, like a merger or acquisition
, or an asset sale, and 2) the employee thereafter terminates employment for any reason. This type of agreement is not common and is usually reserved for senior management employees.
Double trigger: the employee receives payment if, and only if, 1) there is a change of control and 2) the buyer thereafter terminates employment without cause or the employee terminates his employment for good reason.
Modified double trigger: this agreement uses the double trigger provision described above during the transition period (between 6 to 12 months) after a change of control has occurred, and a single trigger described above for some time after the transition period. This type of agreement allows the employee and buyer to determine the desirability of a long-term employment and allows them to either agree on employment terms or simply part ways after the transition period.