Change of Control Definition
Change of control refers to a scenario when the majority ownership of the company and therefore, its business decision making powers moves from one to another. Such controls are always sold to potential buyers at a reasonable price.
Venture capitalVenture CapitalVenture capital (VC) is long-term finance extended to startups with high-growth potential to help them succeed exponentially. The investors are venture capitalists who bear the excessive financial risk and provide guidance to startups to attain their objectives. investors invest in companies that are at the initial stage. They provide funding and imposes control over the management. Slowly when the company starts to grow, and the product starts to gain popularity in the market, the venture capitalist sells its stake to a private equity firmPrivate 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.. So this is a change of control. Now the private equity firm will provide capital to make the company grow further. When the company starts to reach a steady stage, then the private equity firm will either sell it to another private equity or make the company public. So like this at several stages, change of control takes place.
In 2008, Emami acquired a controlling stake in Zandu from Vaidyas at INR6,900 per share. The bidding went for several months and is considered the biggest hostile takeover in INDIA. In the end, INR750 crore was the consideration paid by Emami for a 72% stake in the company. So change of control took place, and Emami was controlling Zandu after that.
Change of Control Agreement
Several agreements may apply to the management of the company.
- Golden Parachute: It mostly happens that the new controller of the company doesn’t 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. is an agreement to give the top executives a hefty bonus in return for their termination from the company. These bonuses help top executives to plan their early retirement or to fund future endeavors.
- At times the existing management may not feel comfortable working with the new controller, so they may want to quit. If the current management is necessary for the operation, then the change in control agreement may provide an incentive to the existing management to stay in the company and perform operations. So this agreement helps to motivate the existing management to continue with their daily operations without getting demotivated.
- Change of Control payment Agreement – It refers to an agreement that entitles existing management to receive a payment if there is any “change of control” during the tenure of the management. So the management will receive a lump sum when it occurs in his tenure. The compensation can be in the form of 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.. It helps management to work wholeheartedly without the fear of leaving 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 change in control of an organization. It is a provision in the agreement of change in control. Not all of this control will trigger this provision. There could be specific criteria that the change in control will trigger if another company acquires more than 50% stake of a company, or maybe sell off most of the assets of the company to a third party, or maximum board members changed.
When it gets triggered, the existing management can ask for payment or quit the organization.
- The new management may have more significant expertise in handling the operations of the businessOperations 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.. The knowledge from the new management can help others to operate the project efficiently.
- Communication with the employees may increase if the previous management was not effective in doing so.
- The new controller may have a vision that will help the organization to achieve new heights. The new controller may change the product line and reach areas that are in more demand.
- The morale of employees can be boosted from the new controller if he has past proven records of good leadership.
Change of control is common throughout the world. It has been seen that companies have benefited from a change in control. If the new controller is visionary and plans to grow the company forward, then it will be beneficial.
It has been a guide to the change of control and its definition. Here we discuss example, agreement, payment, and clause along with advantages. You may learn more about financing from the following articles –