Mercury Systems rebuffs former CEO's unusual pay demand

By David Carnevali

NEW YORK (Reuters) - U.S. military chip maker Mercury Systems Inc is locked in an unusual dispute with its former chief executive who is demanding a payout, most recently valued at $33 million, because the company tried to sell itself, regulatory filings show.

Mark Aslett, who had served as Mercury's CEO since 2007, is relying on his so-called change-in-control agreement with the company to claim the payout, according to one of the filings.

Change-in-control agreements typically incentivize CEOs to press on with selling their company when they stand to lose their job. The dispute with Mercury offers a rare example of such an agreement giving rise to a big payout claim even when no deal has been secured, three corporate governance experts interviewed by Reuters said.

"If as CEO you sell your company you typically lose your job, so change-in-control payouts are there to compensate you if you have successfully sold your company," said Marc Hodak, a partner at executive compensation consultant Farient Advisors LLC.

The value of the change-in-control payout hinges on Aslett's unvested shares and Mercury's stock price. It was worth $33 million in July 2022, according to Mercury's most recent disclosure on the matter. Mercury's shares have lost about half their value since then, and the company does not provide enough information to calculate the current value of the payout.

Aslett resigned on June 19, four days before the company said it had concluded a review that included a potential sale of the company without reaching any deal.

In his resignation letter, Aslett said he was entitled to the change-in-control payout even though that change did not occur.

Mercury said its board of directors disputed Aslett's claim to the change-in-control payout. Without it, Aslett would be entitled only to a $2.4 million severance package, a Mercury regulatory filing shows.

The three corporate governance experts interviewed by Reuters said few companies allowed for change-in-control payouts when that change was explored and did not occur.

Charles Elson, founding director of the corporate governance center at the University of Delaware, said the language in Aslett's agreement with Mercury was unusual.

In Aslett's employment contract with Mercury, the company includes publicly announcing its "intention to take or to consider taking actions which, if consummated, would constitute a change in control" as a condition for the associated payout to the CEO to occur, a regulatory filing shows.

But the contract stipulates that to be eligible for the change-in-control payout, Aslett also needed to resign for "good reason." It outlines six types of circumstances that would constitute good reason. They include a reduction in compensation or benefits or other changes in his employment.

Mercury said it objected to Aslett's claim to a change-in-control payout because it did not agree with his contention that he resigned for good reason. It did not dispute that he resigned during a potential change-in-control period. The filing does not state what explanation Aslett gave to Mercury as good reason or why the latter disputed it.

Aslett and Mercury did not respond to questions about the dispute and how it may resolved.

Mercury, which has a market value of $1.9 billion, decided to end the process to sell itself after just one round of offers, because the bids assigned it little to no premium to its share price, a person familiar with the matter said. Mercury appointed board director William Ballhaus as interim CEO while it seeks a permanent replacement.

SUPPLY-CHAIN ISSUES

The Andover, Massachusetts-based company attracted acquisition interest in spring 2022, when it was worth double its current value. Hedge fund Elliott Investment Management approached it to express acquisition interest, people familiar with the matter said. Elliott declined to comment.

From 2014 to 2020 Mercury enjoyed robust growth, aided by acquisitions, which led to its shares outperforming many of its peers. But in the past two years it has stumbled, as supply-chain issues weighed on production of chips, circuits, computer panels and other components used in the manufacturing of technology equipment for the military.

Yet even after its shares had dropped by a third from their 2020 high, Mercury agreed to a big jump in Aslett's pay last year, granting him stock awards that boosted his total compensation from $4.9 million in 2021 to $18.6 million in 2022, a regulatory filing shows.

"(Aslett) wants a change-in-control payment simply for saying 'I got the company ready for sale, investment bankers have been hired and I've done my job so please pay me,'" consultancy firm Alchemy Strategies Partners' managing partner, Francis Byrd, said.

"I would have certainly found it to be an unusual request."

(Reporting by David Carnevali in New York; Additional reporting by Svea Herbst-Bayliss in New York; Editing by Greg Roumeliotis and Matthew Lewis)