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Discretionary Clawback Policies: Risk of Variable Stock Plan Accounting

ChartCompanies should be aware that at least some major accounting firms are questioning whether discretionary aspects of clawback policies trigger variable accounting for compensatory equity awards granted by those companies. Existing accounting guidance (ASC 718-10-30-24) would seem to suggest that clawback features should not disrupt fixed accounting treatment because of their contingent nature.

Now, however, PricewaterhouseCoopers and KPGM, at least, are publicly expressing concerns about clawback policies focusing on their discretionary, rather than contingent, nature. A 2013 PricewaterhouseCoopers survey of 100 companies indicated that nearly 80% of those companies had clawback policies that had problematic discretionary provisions. A clawback policy could involve discretion as to what circumstances it may apply; whether it should be applied; and, if applied, how severely it should be applied. It seems that all aspects of discretion may be problematic. Companies

83(b) Elections

83(b) Elections

September 5, 2014

Authored by: Chris Rylands

Our sister blog, Start-Up Bryan Cave, recently posted about when and why to use the an 83(b) election.  The post has a good discussion of the advantages and disadvantages.

One item it does not mention is the company’s deduction, which is taken if and when the 83(b) election is made.  In the absence of an election, the deduction occurs when the property vests.

Of course, for the company to take the deduction, it has to know that the election has been made.  Even though the IRS rules require the recipient to give a copy to the company, another valuable planning point is to make sure that the agreement itself also requires the recipient to provide a copy of the election to the company.

Looking Ahead – ISS 2014 Draft Policies and Proxy Survey Results

Looking Ahead – ISS 2014 Draft Policies and Proxy Survey Results

October 24, 2013

Authored by: benefitsbclp

Looking Ahead – ISS 2014 Draft Policies and Proxy Survey Results

Institutional Shareholder Services (ISS) conducts an annual survey to obtain input on corporate governance issues.  The survey results are considered by ISS in preparing annual updates to its proxy voting policies.  The survey often provides insight into potential ISS policy changes for the upcoming proxy season.

A few weeks ago, ISS released the results of its 2014 proxy voting survey.  ISS received more than 500 responses from institutional investors and corporate issuers located within and outside of the United States.   The 2013-2014 Policy Survey Summary of Results can be accessed here.  This week ISS posted draft 2014 policies for comment here.  The draft policies include proposed changes for U.S. companies to Board Response to Majority-Supported Shareholder Proposals and the ISS Pay for Performance Quantitative Screen.  The comment period will close on November 4, 2013

SEC Releases Letter Clarifying Application of Section 402 of Sarbanes-Oxley Act

Last month the SEC issued a no-action letter to a financial services firm that sheds light on the scope of the prohibition under Section 402 of the Sarbanes-Oxley Act of 2002 which makes it unlawful for an issuer to “extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or any executive officer . . . of that issuer.” 

Historically, the SEC appears to have been reluctant to issue formal guidance respecting the parameters of the loan prohibition under Section 402.  Common arrangements left in limbo by this lack of regulatory guidance extend to personal use of company credit cards, personal use of company cars, travel-related advances, and broker-assisted option exercises. 

The SEC’s no-action letter was issued to RingsEnd Partners, a financial services firm.  The letter addresses a program established

He Fought the Law, and 409A Won

He Fought the Law, and 409A Won

March 14, 2013

Authored by: Chris Rylands

In this recently reported case, one Dr. Sutardja, a recipient of an allegedly discounted option, sued to recover 409A taxes imposed by the IRS.  The case does not decide whether the option was discounted, but Dr. Sutardja argued that his option, even if discounted, shouldn’t be subject to 409A.

Essentially, he tried to argue that (1) the grant of the discounted option is not a taxable event, (2) stock options aren’t “deferred compensation,” (3) he didn’t have a legally binding right until he exercised the option, or (4) 409A couldn’t apply to the discounted option.  Those familiar with 409A will sigh upon reading the list since clearly none of these arguments holds any water.  Discounted options are subject to 409A and must have fixed dates for exercise and payment.

The interesting part of the case, though, was the government arguing that Dr. Sutardja did not have

Executive Compensation – 2012 Year-End Compliance and 2013 Planning

It’s that time of year again!  Time to ensure year-end executive compensation deadlines are satisfied and time to plan ahead for 2013.  Below is a checklist of selected executive compensation topics designed to help employers with this process.

I.       2012 Year-End Compliance and Deadlines

□      Section 409A – Amendment Deadline for Payments Triggered by Date Employee Signs a Release

It is fairly common for an employer to condition eligibility for severance pay on the release of all employment claims by the employee.  Many of these arrangements include impermissible employee discretion in violation of Section 409A of the Internal Revenue Code because the employee can accelerate or delay the receipt of severance pay by deciding when to sign and submit the release.  IRS Notice 2010-6 (as modified by IRS Notice 2010-80), includes transition relief until December 31, 2012 to make corrective amendments to

Proposed Changes to ISS Proxy Voting Policies

On October 16, 2012, Institutional Shareholder Services (ISS) issued for comment several proposed proxy voting policy changes.  The following would affect U.S. public companies:

Board Matters

Current Policy: Recommend vote against or withhold votes from the entire board (except new nominees, who are considered case-by-case) if the board failed to act on a shareholder proposal that received the support of either (i) a majority of shares outstanding in the previous year; or (ii) a majority of shares cast in the last year and one of the two previous years.

Proposed Policy: Recommend votes against or withhold votes from the entire board (with new nominees considered case-by-case) if it fails to act on any proposal that received the support of a majority of shares cast in the previous year.

The proposed change is intended to increase board accountability. ISS is specifically seeking feedback as to whether there are specific circumstances where

A Waste of Restricted Stock Units?

A Waste of Restricted Stock Units?

July 27, 2012

Authored by: benefitsbclp

In a decision released on June 29, the Delaware Chancery Court (a trial court) in Seinfeld v. Slager (no, not that Seinfeld) allowed an allegation of corporate waste to survive a motion to dismiss.  The allegation: that directors wasted corporate assets by granting themselves restricted stock units in an excessive amount. The case is significant in part because the court is widely regarded as a leading court on corporate governance issues.

This case is interesting because, most often, compensation of non-employee directors is protected under the “business judgment rule” that basically prevents courts from second-guessing the decisions of a board of directors.  However, the business judgment rule is generally not available for transactions where directors have a financial interest that could reasonably compromise their independent judgment.  In asserting the protection of the business judgment rule, the directors argued that the stock plan under which the awards

Common 409A Misconceptions

Common 409A Misconceptions

July 24, 2012

Authored by: benefitsbclp

Every 409A attorney knows the look. It’s a look that is dripping with the 409A attorney’s constant companion – incredulity. “Surely,” the client says, “IRS doesn’t care about [insert one of the myriad 409A issues that the IRS actually, for some esoteric reason, cares about].” In many ways, the job of the 409A attorney is that of knowing confidant – “I know! Isn’t it crazy! I can’t fathom why the IRS cares. But they do.”

There are a lot of misconceptions out there about how this section of the tax code works and to whom it applies. While we cannot possibly address every misconception, below is a list of the more common ones we encounter.

I thought 409A only applied to public companies. While wrong, this one is probably the most difficult because it has a kernel of truth. All of the 409A rules apply to all companies, except one.

IRS Proposes Regulations on Substantial Risk of Forfeiture

The IRS has released proposed regulations under Section 83 of the Internal Revenue Code to refine the concept of what constitutes a substantial risk of forfeiture for the purpose of narrowing the scope of the concept.

The proposed regulations are in response to case law, tracing back as far as 1986, which the IRS claims has created confusion over the appropriate elements of what may constitute a substantial risk of forfeiture.

In the proposed regulations, the IRS clarifies that a substantial risk of forfeiture may be established only through (1) a service condition or (2) a condition related to the purpose of the transfer, such as a performance condition relating to the services provided by a service provider. In addition, the proposed regulations further clarify that in determining whether a substantial forfeiture exists based on a condition is related to the purpose of the transfer, both the likelihood

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