Because of the various benefits, securities, and tax laws that apply to equity awards, what may be permissible (and even commonplace) in one jurisdiction, may be problematic in another. Accordingly, whenever an issuer desires to issue equity awards to service providers (e.g., employees or contractors) in a different jurisdiction, the issuer should engage benefits, securities, and tax counsel in all relevant jurisdictions early in the process to avoid any unanticipated issues that could negatively impact the value or purpose of the awards. For example, a common issue occurs when the issuer is an entity outside of the United States, but equity awards will also be made to service providers in the United States. Under U.S. tax law, there are specific requirements for determining the exercise price of stock options and stock appreciation rights (under Section 409A of the U.S. Internal Revenue Code (?Ç£Section 409A?Ç¥)) that require the exercise price to… Continue Reading
Employee benefits rarely drive corporate transactions, but if the benefits of a target company are not reviewed carefully, they can sometimes derail the transaction. Even some of the most routine facets of benefit plan administration can result in significant potential financial exposure (e.g., additional employer contributions, taxes, penalties, and fees as well as fees associated with the preparation and filing of IRS and DOL correction program applications) that could negatively affect the overall value of the target company. By identifying issues early in the transaction, the seller can prevent costly purchase price reductions and identify issues that need correction, while the buyer can avoid overpaying for a target and ensure that representation and warranty insurance will be available to cover potential claims. Some of those routine compliance issues include, but are not limited to, the following: Failing to timely file an annual Form 5500. The DOL can assess a penalty… Continue Reading
Most equity-based performance awards for employees that will vest at the end of 2020 were granted well before the COVID-19 pandemic began (in fact, many were granted two years or more before the pandemic), and none of the performance metrics for these awards likely anticipated the havoc the pandemic has caused to the companies?ÇÖ financial and stock performance. In many cases, the pandemic has rendered these equity-based performance awards worthless to employees because the performance metrics are not even remotely achievable. Yet, employees have been working harder than ever to meet the challenges of the pandemic. Some employers looking for ways to continue to reward and retain employees are eyeing modifications of existing equity-based performance awards to either lower the target and stretch performance goals or to eliminate the performance requirement completely, at least for awards vesting in 2020 (making the awards solely time-based). Before proceeding with any such modifications,… Continue Reading
IRS Issues Memorandum Providing Guidance on Income Inclusion, FICA, and Income Tax Withholding for Stock-Settled Equity Awards
The IRS recently issued Generic Legal Advice Memorandum No. AM 2020-004 (the ?Ç£GLAM?Ç¥) to address when income from nonqualified stock options, stock-settled stock appreciation rights, and stock-settled restricted stock units is (i) includable in an employee?ÇÖs gross income, (ii) subject to FICA taxes, and (iii) subject to federal income tax withholding. In addition, the GLAM provides a discussion of the deposit rules for FICA and income tax withholdings that have been withheld with respect to such equity awards, including the ?Ç£One-Day?Ç¥ rule (or the Next-Day Deposit Rule) that requires employers to deposit employment taxes on the next banking day after $100,000 or more in employment taxes have been accumulated. The GLAM provides a series of illustrative examples and analyses of such issues. The GLAM does not, however, address the impact of an employer?ÇÖs ability to defer employment tax deposits under Section 2302 of the Coronavirus, Aid, Relief and Economic Security… Continue Reading
Boards and compensation committees will be reevaluating their incentive compensation arrangements in light of the COVID-19 pandemic and the resulting market uncertainty. Both long-term and short-term incentive plans can lose motivational and retention value if the performance goals are unachievable or if they do not align with market reality. Companies that have not yet established performance goals for their 2020 equity and bonus awards should carefully consider market conditions and shareholder perception before establishing goals, focusing on motivating their executives with pay for performance that aligns with shareholders?ÇÖ interests, while giving the company flexibility to navigate through uncharted territory. To the extent possible, companies should also consider delaying the issuance of incentive compensation awards until there is more stability in the business and in the financial markets. Companies that have already established goals for their 2020 awards (or that are evaluating the continued effectiveness of performance goals for prior year… Continue Reading
On March 26, 2020, Glass Lewis released its governance report discussing its approach to corporate governance in light of the COVID-19 pandemic. According to the report, Glass Lewis expects all governance issues to be impacted by COVID-19 and will be taking a pragmatic approach to corporate governance and voting on affected proposals, prioritizing disclosure and timing and certainty on such matters, and exercising discretion as appropriate. Glass Lewis states in the report that: “The stark reality is that for many workers, including executives, they should not expect to be worth as much as they were before the crisis, because their free market value as human capital has now changed. There is a heavy burden of proof for boards and executives to justify their compensation levels in a drastically different market for talent . . . Trying to make executives whole at even further expense to shareholders and other employees is… Continue Reading
In a recent Delaware Court of Chancery case, stockholders brought suit against a company?ÇÖs directors alleging breach of fiduciary duty for awarding themselves ?Ç£grossly excessive compensation.?Ç¥ The excessive compensation in question included equity grants issued pursuant to the company?ÇÖs equity incentive plan. The terms of the stockholder-approved plan provided limits on the number of shares that the company could issue as stock options, restricted stock, and restricted stock units and on the number of shares the company could award to employees and directors. The court held that the specific equity awards could be reviewed pursuant to the business judgment rule, which is the standard used to review executive compensation approved by a disinterested committee rather than a more stringent standard required for ?Ç£self-dealing.?Ç¥ In applying the business judgment rule, the court found that it was critical that the director-specific limits set forth in the plan differed from the limits that… Continue Reading
July 6, 2015 is the deadline to register and self-certify share-based incentive plans or schemes, whether tax-advantaged or non-tax-advantaged, that are sponsored or maintained by companies for the benefit of their employees in the United Kingdom (“U.K.“). The registration and self-certification can be completed online with U.K. tax authorities (HM Revenue and Customs). Failure to meet the July 6, 2015 deadline may result in losing tax advantages and incurring penalties. For more information on the U.K. share registration requirement, please see our prior post here.
Institutional Shareholder Services (“ISS“) has issued its U.S. Equity Plan Scorecard (“EPSC“) frequently asked questions for 2015, effective for meetings on or after February 1, 2015. For the 2015 proxy season, ISS intends to take a “more nuanced consideration of equity incentive programs” instead of applying a rigid pass/fail methodology, that will consider a range of positive and negative factors based on three “pillars” of plan cost, plan features, and grant practices. However, the new methodology will continue to result in “Against” recommendations for plan proposals that feature certain “egregious characteristics” (such as authority to reprice stock options without shareholder approval, single trigger change of control vesting, and tax gross-ups). Proposals related to the adoption or amendment of stock option plans, restricted stock plans, omnibus stock plans, and stock appreciation rights plans (stock-settled) will be evaluated under the EPSC policy. A copy of the FAQs may be found here.