Trust CEO's Plan B: Let’s join the abusive corporate gravy train

Unlike the CEOs of trust companies, trust investors have no plan B. Which probably explains why we are squawking and they are not:



Compensation issues raised by trust conversions

Change-of-control could trigger big payouts

BY JIM MIDDLEMISS,
THE FINANCIAL POST
DECEMBER 9, 2009


Investors won't be happy to learn that the federal government's move to phase out income trusts could mean a big payout for executives running them.

Everything from employment contracts to stock options, bonus plans and incentive agreements will have to be reviewed to see if the conversion back to a company triggers a change-of-control provision and requires converting trusts to pay their executives money owed under those agreements.

"It's possible, depending on the drafting, that you could trigger a change-of-control covenant and have to vest all bonuses and options," warned Simon Romano, a lawyer at Stikeman Elliott in Toronto, a law firm that was heavily involved in helping companies move to the income trust model.

However, Mr. Romano is quick to add that given the current corporate governance climate and the growing revolt against excessive executive pay, expectations will be tempered and he expects there will be "waivers on these kinds of things."

Dawn Whittaker, a corporate securities lawyer at Ogilvy Renault, adds "we don't expect there is going to be a great flurry of terminations or even termination payments asked for."

Nonetheless, shareholder advocates will need to diligently watch over the conversion process.

Converting a trust back to a company is no simple task, and while Mr. Romano said there "haven't been too many yet," he expects an "onslaught next year."

The TSX still has 169 listed trusts and lawyers predict many of those will convert in the coming year.

Some will remain as trusts, using up tax loses they have acquired and others will be swallowed in merger activity. Mr. Romano expects about 100 to convert, 30 to remain as trusts and the rest to be involved in mergers.

"There's clearly a transition cost moving from a trust to a company," says Mr. Romano.

It requires that trusts revisit all of their documentation, including their bank debt agreements which typically prevent change-of-control transactions, compensation plans, severance agreements, collective agreements and a range of other legal documentation.

However, it's on the compensation front where a lot of the fine tuning will be required.

For example, when GMP Capital Trust converted to a company, it repriced its stock options for executives to reflect the nature of the new company.

Lawyers say that the modifications will depend on what the new company's strategy is going forward.

If a converting trust decides to move from paying out most of its earnings to retaining them and becoming a growth company, that means reviewing compensation plans because the metrics on which the executives are judged will change significantly.

"You want to keep your people happy," says Mr. Romano, whose firm has created a 20-page conversion guide for trusts that canvasses a number of issues.

Ms. Whittaker says that "incentive plans are an area where there will be some work that needs to be done.

"I don't expect it will be controversial in nature."

She adds that some trusts may use the conversion as an "opportunity to clean house" and dump its board or even management.

The conversion process, she says, provides trusts with a opportune chance to "renew" themselves.

jmiddlemiss@nationalpost.com