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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

Jumpstart Our Business Startups Act (JOBS ACT) Contains Executive Compensation Provisions

Update (2:45 PM): As expected, President Obama has signed the JOBS Act into law.

The JOBS Act is expected to be signed by President Obama today. According to the Act, it is intended:

To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.

The Act includes provisions relating to crowdfunding, access to capital markets, exemptions to encourage small company capital formation, increased private company shareholder threshold for registration, and reduced public company compliance and disclosure burdens for “emerging growth companies.”

In addition, Title I of the Act “ Reopening American Capital Markets to Emerging Growth Companies,” includes changes to executive compensation disclosure requirements for emerging growth companies.

Emerging Growth Company. An emerging growth company means a company with total annual gross revenues of less than $1 billion (indexed for inflation). Only companies with an IPO after

Five Common 409A Design Errors: #5 Payment Periods Longer than 90 Days

This post is the fifth and final post in our benefitsbclp.com series on five common Code Section 409A design errors and corrections. Go here, here, here, and here to see the first four posts in that series.

Code Section 409A abhors discretion. One concern with discretion is that it could lead to the type of opportunistic employee action or employer/employee collusion that hurt creditors and employees during the Enron and WorldCom scandals.

Another concern is that discretion could be used opportunistically to affect the taxation of deferred compensation. Consider an employment agreement with a lump-sum payment due at any time within thirteen months following a change in control, as determined in the employer’s discretion. This provision would permit the employer to pick the calendar year of the payment. Because non-qualified payments are generally taxable to the recipient when paid, this type

Five Common 409A Design Errors: #4 No Six-Month Delay for Public Company Terminations

This post is the fourth in our benefitsbclp.com series on five common Code Section 409A design errors and corrections. Go here, here and here to see the first three posts in that series.

Code Section 409A is, in part, a response to perceived deferred compensation abuses at companies like Enron and WorldCom. The story of Code Section 409A’s six month delay provision is inextricably tied to the Enron and WorldCom bankruptcies.

Under established IRS tax principles, participants’ rights under a non-qualified plan can be no greater than the claims of a general creditor. Because deferred compensation plans often pay out upon termination of employment, a plan participant with knowledge of a likely future bankruptcy could potentially terminate employment and take a non-qualified plan distribution to the detriment of the company’s creditors (a number or Enron executives with advance knowledge of Enron’s accounting irregularities

March 15th: Code Section 409A Day

March 15th: Code Section 409A Day

March 12, 2012

Authored by: benefitsbclp

Your company sponsors an annual bonus program. Bonuses are tied to company calendar year performance. The bonus plan says that payments are to occur by March 15th of the year following the performance year. March 15th has always struck you as an odd date.

A friend at another company calls you up, very excited. Her company’s financial performance last year was stellar, and she’s expecting a large payment by March 15th. Another friend at a different company mentions that he’s buying new furniture on the 17th. The proximate cause? Annual bonuses are paid on March 15th.

It is no coincidence that companies often pay out annual bonuses around March 15th. In the case of a company with a calendar year tax year, paying bonuses by March 15 will generally allow the company to deduct the bonuses in the tax year which ends on the prior December 31. But there may

Five Common 409A Design Errors: #3 Multiple Forms of Payment

Five Common 409A Design Errors: #3 Multiple Forms of Payment

March 8, 2012

Authored by: benefitsbclp

This post is the third in our benefitsbclp.com series on five common Code Section 409A design errors and corrections. Go here and here to see the first two posts in that series.

Let’s say that you are negotiating your CEO’s new employment agreement. Because she is preparing for retirement, the CEO would like to be entitled to a stream of monthly lifetime separation payments upon her voluntary termination. This type of lifetime benefit makes sense for your company, and, based on the CEO’s long and faithful service to the company, you agree.

The CEO then asks for a provision calling for an immediate lump-sum payment upon her involuntary termination. The amount of the payment would be the present value, using reasonable actuarial assumptions, of the monthly separation pay annuity. This request seems reasonable – the fact that things may go sour in the future doesn’t

Five Common 409A Design Errors: #2 Reimbursements

Five Common 409A Design Errors: #2 Reimbursements

February 24, 2012

Authored by: benefitsbclp

Over the next several weeks, we will be writing about five common Code Section 409A design errors and corrections.

It should (but will not) go without saying that Code Section 409A has an extraordinarily broad reach. Many claim this reach is overbroad. One commonly cited example of this overbreadth is that Code Section 409A regulates taxable employee reimbursements.

Why does Code Section 409A regulate reimbursements? The concern is that an employee and employer will collude to achieve reimbursement of extravagant personal expenses many years after the expense is incurred. This “late” reimbursement would have the effect of unreasonably deferring taxation of the reimbursable expense, potentially into a year that is tax-advantageous for the employee.

The IRS’s solution? Ensure that expenses eligible for reimbursement are objectively determinable and reimbursed within a limited period of time following the date in which the expense is incurred. Here’s a list of the IRS’s

Five Common 409A Design Errors: #1 Employment Claims Releases

Five Common 409A Design Errors: #1 Employment Claims Releases

February 15, 2012

Authored by: benefitsbclp

Over the next several weeks, we will be writing about five common Code Section 409A design errors and corrections.  This is the first of those posts.

You are designing an executive employment agreement with a substantial severance component. For the amount of severance, it seems fair to condition payment upon execution of an agreement waiving all employment claims (ADA, age discrimination, etc.). Why not just say that severance payments don’t begin until the executive returns the claims release? The answer – Code Section 409A.

Incredulous? Here’s the concern. An employee who will begin to receive severance upon return of a release could potentially hold on to the release until the year following his or her termination. What does that achieve? Because the severance is taxable when actually paid, the employee could hold on to a release, defer taxation, and ultimately pay fewer taxes on the severance. Employee discretion as to

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