CLIENT ALERT: Please read this special message.

Could Talen 'Golden Parachute' Deals for Execs Signal Merger or Takeover?

The Morning Call—Scott Kraus

If Allentown-based Talen Energy is sold, taken over or merged with another company, three of the company's top executives can rest easy.

Talen signed deals with its chief financial officer, chief commercial officer and chief nuclear officer in December, promising that if there is a change in control of the company and they lose their jobs, they'll get severance pay worth twice their annual salaries plus bonus payouts and health benefits.

The deals, which are called change-in-control agreements and are often referred to as "golden parachutes," were filed Monday with the Securities and Exchange Commission.

They're often signed when a company is the subject of merger or takeover talk to prevent key executives from leaving out of concern for job security, said Wayne Outten, a New York City attorney who specializes in negotiating employment contracts and reviewed the filing.

"Typically, it is when the possibility of a change in control is not merely a hypothetical but it is something people are considering and contemplating and the senior leadership would be aware, even if it is not yet public," said Outten, founding and managing partner of Outten & Golden LLP.

They are also designed to help key executives evaluate merger or acquisition deals objectively, without concern for their employment future, he said.

"They have an incentive to make it work," he said. "Assuming the board decides this is something the board wants to do for the benefit of the shareholders, the executives are not going to be pulling in the opposite direction because they are concerned about their jobs and careers."

Talen's stock price has fallen sharply since the company went public June 1, increasing speculation that the company could be a takeover target, or part of a merger. Talen's stock closed at $6.23 Thursday, down from $21 when it began trading.

Other stocks in the power-generation sector have suffered similar declines, as cheap natural gas, federal pollution regulations, mild weather and lackluster demand have undermined profits and put pressure on companies to grow through acquisitions.

Each company defines change in control differently, but it typically means a change in the ownership of a controlling interest in the company's shares, a turnover of the board of directors or a sale of the company's assets, Outten said.

The change-in-control agreements cover three of Talen's senior vice presidents: Jeremy R. McGuire, chief financial officer, whose base salary is $463,000; Clarence J. Hopf, Jr., chief commercial officer, who earns $400,000; and Timothy S. Rausch, chief nuclear officer, who earns $489,745.

Each also qualifies for stock options, restricted stock units and performance unit grants ranging from about $840,000 to $1.1 million a year. It is unclear how much of that is covered by the agreements.

Talen spokesman Todd Martin said the change-in-control agreements are standard practice. "Agreements and provisions similar to those disclosed are not unusual for a public company, and the filing itself is a standard regulatory requirement."

The company's SEC filing spells out Talen's rationale.

"The board of directors of the company recognizes that as is the case with many publicly held corporations, the possibility of a change in control exists, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of the company and its share owners," Talen spells out in the preamble to the agreements.

It goes on to say "the board has determined appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of management."

The agreements are sometimes referred to as "golden parachutes," according to the Center for Executive Compensation.

"Executives are fiduciaries, charged with taking action in the best interest of the company and the shareholders," the group says on its website, in its definition of change-in-control agreements. "However, CEOs face inherent difficulties when it comes to a merger or a sale of the business, the end result of which will result in the executive losing their position. Change-in-control agreements are structured to encourage executives to seek out and enter into sale or merger opportunities when it is in the best interest of the shareholders without having reservations about losing their own positions."

Talen Energy, headquartered in PPL Plaza on Hamilton Street in downtown Allentown, was created in June when PPL Corp. spun off its power generation division, PPL Energy Supply, combining it with certain assets of New York-based Riverstone Holdings to form a new company focused exclusively on generating and marketing electricity.

Talen's lease on the building expires in 2018, leading to speculation about where the company will put down corporate roots. With more than 500 white-collar employees, Talen is seen as a critical piece of Allentown's downtown revitalization.

A sizable chunk of the company's state taxes are redirected, under Allentown's Neighborhood Improvement Zone, toward debt payments on PPL Center, the city's new arena. City and state officials have said it's important to keep the company in Allentown.

In October, the Allentown Neighborhood Improvement Zone Development Authority passed a resolution that would facilitate a move by Talen to The Waterfront, a proposed office, retail and apartment development on the city's Lehigh riverfront, within the boundaries of the NIZ.

Under the change-in-control agreement, the three executives would be guaranteed cash payments equal to twice their annual salary plus an average of recent bonuses, two years' worth of payments to continue their company health insurance and outplacement services worth up to $50,000 in addition to any incentive payments they are owed.

In exchange, they promise to stay with Talen if a potential deal to change control of Talen is publicly announced, or is in the works, until it falls apart or takes place.