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The treatment of equity compensation in a change-in-control is complicated and perhaps the most complicated of all is the spin-off. We recently posted an article by Michael Gorski of Semler Brossy that looks at various ways outstanding stock grants are handled in a spinoff (“Keeping Your Equity Strategy in Balance Through a Corporate Spin‐Off,” originally published in workspan).
Gorski explains that, to minimize concerns over employee relations, companies should seek an outcome in which the pre-spin equity value is preserved. He breaks the approaches into various types, including the following two most common methods:
Gorski provides a few examples from high-profile deals. For instance, when PayPal was spun off from eBay, it used the “employee approach” for employees staying with eBay or shifting to PayPal, but for executives in charge of a smooth transition, it used the “shareholder approach.”
When Kraft Foods spun off from Mondelez International, Gorksi notes that the transaction used the “shareholder approach” for options, SARs, restricted stock, and deferred stock units to encourage a collaborative environment between the companies. However, for performance shares, it used an “employee approach” to align directly with each company’s post-spin goals.