In the right circumstances, a modification of the properly developed control agreement may provide a win-win situation for both parties. When considering similar provisions, the executive and its board must carefully consider each word and its use in the agreement. Minor language changes can have huge and sometimes costly consequences for the executive. Remember, the terms define the „intent“ of the parties. If a particular term is not included in the agreement, it is not applied. Similarly, if the controversial term is negotiated in one way or another in the agreement, the executive or company will press heavily to remove the term as soon as a dispute arises. Once the change in the control and trigger rules is completed, the gold parachute payment must be fixed. In 1984, Congress passed the Deficit Reduction Act as a tax fine in response to a period of intense corporate takeover activity, in which entrenched management teams used golden parachutes to maintain control. Senate Comm. on Finance, 98th Congress, Deficit Reduction Act of 1984, Explanation of Provisions Approved by the Committee on March 21, 1984.
The Act created two new sections of the 280G internal income code, which does not allow deductions for excess parachute payments, and Section 4999, which applies a 20% excise duty to the executive for excess payments by parachute. The specific provisions of the two sections can be summarized as follows: a „parachute payment“ is any payment to a „disqualified person“ in the nature of the compensation, where that payment depends on a change of control of the company and the total value of all these payments equals or exceeds three times the „basic amount“ of the individual. The basic amount is the average compensation of the person who is included in the gross income in the five years of taxation prior to the fiscal year in which the change of control occurs. An „oversupply payment“ is any parachute payment greater than the portion of the base amount allocated to that payment. A „disqualified person“ is any person who is an employee or contractor independent of a company and who is a public servant, shareholder or highly compensated person. Regardless of the size of an organization, executives could be subject to dual responsibilities, relocations or downgrades when merging or taking over a business – totally unfavourable results. „However, by changing control, the executive might be better able to find other solutions to the problem than simply taking the business further down the ground,“ Tyler suggests. (ii) the employer pays the executive, as severance pay and instead of additional compensation, a cash amount equal to two and a half times (2 1/2) of the total amount (A) of the base amount and (B) of the amount of the bonus; However, if there is an employment contract between the company and management on the day of the termination, any amount owed to the executive in accordance with this section 3 b) (ii) is reduced by the basic amount and the amount of the bonus paid as severance pay with severance pay instead of compensation for periods following the termination date. A change of control is often supported by a company to encourage employees to continue their work at least until a purchase, sale, restructuring or other significant change of the business is completed.