When a business falls under new management as a result of a merger or acquisition, its executives may well have reason to worry. Apart from the prospect of losing their jobs to counterparts at the acquiring firm, their non-qualified benefits packages could be substantially modified–or gutted entirely–if they're not protected by a well designed Rabbi trust.
An executive at Wachovia Bank and Wilmington Trust offered these words of warning during an afternoon session of the Association for Advanced Life Underwriting, held in Washington last month. Titled "Don't Let a Change in Control Turn Your COLI Business Upside Down," the workshop explored issues to consider before, during and after a change in company management, how to select a trustee, and the role of the advisor when establishing a trust.
"Often when executive compensation arrangements are put together, a lot of time is spent on plan design, benefits, administration and the funding mechanism, but the trust itself is an after-thought," said Peter Quinn, a senior vice president and managing director at Wachovia Bank, Winston-Salem, N.C. "Advisors need to point out to clients that there may be unintended consequences if trust protection issues aren't addressed."
Just as, Quinn added, the U.S. Department of Labor can require companies to honor their qualified plan commitments to employees under ERISA law, a "protective" Rabbi trust can assure that promises made to executives with respect to non-qualified compensation plans are fulfilled.
The need for such protections, he said, is evident during a "potential" change in control: the period between an acquisition or merger's announcement and when the deal closes. Oftentimes, an acquiring company will seek to modify or scuttle the executive pay arrangements because the plans are at odds with the new management team's corporate objectives.
"Before a change in control, a company has the flexibility to position the trust as needed and advisors can influence its design and benefit security features," said Michael Hlavin, vice president of Wilmington Trust, Wilmington, Del. "But once a letter of intent or purchase agreement is inked, the trustee needs to step up fiduciary oversight and lock down the trust to protect its provisions."
Quinn emphasized that language specifically covering a transitional period must be included in the trust document to restrict the acquiring company's ability to make modifications. Among several "war stories" he recounted, one involved an international oil conglomerate that had simultaneously acquired two Wachovia clients. Though both firms had incorporated change in control language into their respective trust documents, only the one that adopted potential change in control provisions succeeded in fending off trust amendments that would have watered down its executives' compensation arrangements.
After a change in control, said Quinn, the trustee or a pre-determined committee stipulated within the trust agreement may become responsible for investments or other trust-related decisions. In the event of disputes involving benefits, plan participants may be provided with a 3rd party to make a benefits determination or to offer a second opinion on benefit disputes.
