Kudos! Merck "Reforms" Change Of Control Payout Provisions

In an SEC Form 8-K filed yesterday, Merck disclosed actions taken by its compensation committee of the board of directors. Those actions were taken on Monday. In general, the company has reduced the size of the payouts, in a change of control setting, by eliminating extra credit for years of service (under the pension plans), and by reducing the number of executives entitled to such payouts.

These are welcome reforms, to be sure. And Mr. Frazier should be credited for leading the board to start reeling in all of this excessive severance pay, at the top of the house.

Most importantly, though from my vantage point, Merck has redefined what kinds of deals are covered as a change of control transaction. To my eye, it seems reverse mergers between the subsidiary companies (where the putative target acts as the acquiror -- think here of the Schering-Plough transaction) will no longer be covered. That is, if Merck Sharp & Dohme Corp. (currently the operating subsidiary, most akin to old Schering-Plough, in the reverse merger of two years ago) acts as a nominal acquiror, in a transaction where it is actually being acquired by another company -- but just switching shells in the process -- the payouts will not be triggered. I think that's right.

I think the graphic at right may well help explain why Merck is reeling in the merger-time severance plans. It is hard to say that $20 million (should the executive lose his or her seat) wouldn't keep the executive as well-focused on doing the job at hand -- as $200 million might.

In fact, a non-trivial argument can be made that due to the sheer size of the legacy Schering-Plough payouts, its executives were motivated to angle toward a bust-up, rather than fix and run the company independently.

I'll leave that debate to others (though I've argued this before repeatedly), for now. Here is the SEC Form 8-K -- and a snippet -- as well as the revised change of control severance plan document

. . . .Compensatory Agreements and Arrangements


On November 26, 2012, the Compensation & Benefits Committee (the “Committee”) of the Board of Directors of Merck & Co., Inc. (the “Company”) approved an amendment and restatement of the Merck & Co., Inc. Change in Control Separation Benefits Plan (the “Plan”), to be effective as of January 1, 2013. These changes redefine the eligibility criteria and align severance multiples and other plan features with evolving best practices and the Company’s current compensation framework.

The Company’s named executive officers all participate in the Plan, and they may be impacted by certain of the changes that are included in the amended and restated Plan, including the following provisions:

Smaller Covered Population: The amended and restated Plan modifies the group of executives covered under the Plan by narrowing the group of executives who are eligible to participate on or after January 1, 2013.

Reduce Severance Amounts for Certain Participants; Lump Sum Severance: Pursuant to the amended and restated Plan, effective as of January 1, 2013, the multiple used to calculate a participant’s cash severance payment and the formula used to calculate the bonus portion of the total cash severance to which a participant becomes entitled in the event his or her employment is terminated by the Company without “Cause” or he or she resigns for “Good Reason” within two years of a “Change in Control” (as such terms are defined in the amended and restated Plan) have been amended. For the named executive officers and other members of the Company’s executive committee, other than the chief executive officer, if the participant becomes entitled to severance in the circumstances described above, the participant will be entitled to an amount in cash equal to two times the sum of (i) his or her base salary and (ii) the lesser of (a) the participant’s annual target bonus calculated as of the Change in Control date or the termination date, if greater, and (b) the average of the actual bonuses paid to such participant over the last three years in his or her then current position. Previously, a member of the executive committee was entitled to a severance amount in cash equal to three times the sum of (i) his or her base salary and (ii) the participant’s annual target bonus calculated as of the Change in Control or the termination date, if greater. The changes to the severance calculation multiple will not impact the chief executive officer, although the chief executive officer’s severance will be calculated using the amended and restated Plan’s formula for calculating the bonus component of severance, as described above. Severance payments under the amended and restated Plan will be paid in a lump sum.

Modify Subsidized Health and Life Insurance Continuation Benefits. Pursuant to the changes incorporated into the amended and restated Plan, in the termination circumstances described above, the participant is entitled to certain subsidized health and life insurance continuation benefits, which will now be provided concurrently with (and not before) any applicable continuation period under the Consolidated Omnibus Budget Reconciliation Act (COBRA) and before eligibility, if any, for retiree healthcare coverage.

Eliminate Age and Service Credits. Participants will no longer be eligible for any additional years of age and service credit under the Company’s or its subsidiaries’ supplemental executive retirement plans.

Amend Definition of Change in Control and Good Reason: The definition of Change in Control as used in the amended and restated Plan has been modified to raise certain thresholds, thereby increasing the requirements that must be met to trigger the occurrence of a change in control. The definition of Good Reason for the named executive officers was also modified to eliminate one of the triggering events.

Application of Amendments. Any amendments incorporated into the amended and restated Plan that are adverse to any individual who is considered a participant as of the date of the amendment would be null and void, and therefore would not be applicable, if a Change in Control were to occur within one year of the adoption of the amendments. . . .

  We will keep you posted if the popular press picks up on this.

As a footnote, I suppose I ought to also point out that the revised plan prevents the executives from arguing that changing headquarters from Whitehouse Station to the legacy Schering-Plough facility (as announced earlier this year) would trigger a change in control payment. The old plan, I think, specified any more than 50 mile change in office locations. Now, as revised, it is the greater of the 50 miles, or 120 percent of the executive's prior commute from home (measured in miles, not drive time).

That plan provision -- for those of you keeping score at home -- is found at Section 2.17(c)(ii).