If an issuer is looking for a primer or introductory course on Employee Stock Purchase Plans (“ESPPs“), then check out the detailed slide deck that our David Branham put together for our monthly webinar series.  The slide deck is entitled Employee Stock Purchase Plans – The Introductory Course (November 2019 Webinar) and covers the following:

  • Requirements under the tax law,
  • Must have document requirements,
  • Tax consequences to employees and to employers,
  • Compliance requirements with respect to federal securities laws, and
  • International workforce considerations.

The slide deck is detailed and contains more information than is otherwise typical of an “introductory” course.  It could be a useful starting point for issuers who are considering whether to implement an ESPP this upcoming proxy season.

It is common for a key employee to be offered an opportunity to purchase equity of the employer.  Often the key employee can personally finance such purchase.   And sometimes the employer will help the key employee finance the purchase by providing him or her with a loan equal to the purchase price.  The purpose of this Tip of the Week is to remind readers that a substantial part of the loan should be recourse.

  • Risk Associated with 100% Non-Recourse Note – Key Employee Received an Option.   If the loan is 100% non-recourse (meaning the key employee has no personal assets at risk other than the underlying equity securing the loan), then the IRS could take the position that: (i) NO transfer of property occurred at the time of purchase, (ii) at the time of purchase the key employee only received an option (i.e., the key employee has optionality because he or she can walk away from the loan with no personal risk),  and (iii) the tax transfer actually occurred later in time when the loan was repaid by the key employee.  If such IRS position were successful and the fair market value of the underlying equity increased from the date the equity was purchased until the date the loan was repaid, then the key employee would have compensatory ordinary income equal to the spread between the purchase price and the fair market value of the underlying stock when the loan was repaid.  The employer would have a corresponding withholding obligation.
  • Applicable Rules.  The Treasury Regulations provide that if the amount paid for the equity is an indebtedness secured by the transferred property, and there is no personal liability to pay “all or a substantial part of such indebtedness,” then such transaction could be in substance the same as the grant of an option and taxed accordingly.  See Treas. Reg. Section 1.83-3(a)(2).  This Treasury Regulation further provides that the determination of the substance of the transaction will be based upon all the facts and circumstances.
  • Only a “Substantial Part” is Required to be Recourse, the Test Is Not “Substantially All.”  According to a plain reading of Treas. Reg. Section 1.83-3(a)(2), only a “substantial part” is required to have personal liability.  What is a “substantial part”?  90% recourse?  75% recourse?  50% recourse?  If 30% of the loan was recourse, could that percentage be considered a “substantial part” of the whole (i.e., keeping in mind that “substantial” is different and can be less than a “significant” standard)?

The Internal Revenue Code and Treasury Regulations do not provide how much of the loan must be recourse in order to satisfy the “substantial part” test.  But a conservative approach, assuming there are supporting facts, is that at least 50% of the loan must be recourse in order to avoid the IRS successfully treating the purchase as the receipt of an option.

Compensation governance is a front-and-center topic with a continued focus on stock ownership and clawback policies (in part due to the voting guidelines of institutional investors, proxy advisory firms and the Dodd-Frank Act).  At 10:00 am Central on Thursday, October 10, 2019, in a webinar entitled “Stock Ownership Policies & Clawback Policies: Design Pointers,” our Emily Cabrera will be providing a complete overview of stock ownership policies and clawback policies, including a deep dive into their related design choices, prevalence, best practices and disclosure considerations.  And as always, our monthly webinar programs are FREE.  Just click on the title to sign up!

The purpose of this post is to discuss whether incentive stock option (“ISO”) awards should be designed to destroy ISO treatment with respect to terminated employees, thereby preserving the compensatory deduction to the corporation and increasing shareholder value.

Continue Reading Game of Inches: An Idea to Increase Shareholder Value by Destroying ISO Status for Terminated Employees

As a follow-on to last month’s webinar, please join us this Thursday (July 11, 2019) for our FREE webinar entitled Multi-Disciplinary Facets to Net Withholding: It Ain’t Boring.   The purpose of this presentation is to discuss administrative and design considerations when effectuating net withholding with respect to equity awards, including whether to increase the net withholding rate from the minimum statutory rate (i.e., the supplemental rate) to the maximum individual rate.   Sign up at the above link if interested!

Please join us tomorrow morning at 10:00 Central for our free monthly webinar series.  Tomorrow’s topic, “Tips to Increase the Longevity of the Equity Plan’s Share Reserve,” will discuss ideas on how a publicly-traded company can lengthen the longevity of its equity plan’s share reserve, with the hopeful result of the company less frequently seeking shareholder approval to increase such share reserve.  More information can be found at the above hyperlink!

Just a quick reminder that this Thursday (March 14, 2019) we are hosting our monthly webinar program and the discussion topic is “Golden Parachutes & 280G: Design Pointers on How to Win.”  Our discussion will include: (i) an explanation of 280G and how the calculations are applied, (ii) how 280G issues are typically addressed in compensatory documents (discussed from both an employer and employee perspective), and (iii) a description of various mitigation techniques that an employer could implement to eliminate or greatly reduce the negative ramifications of 280G (i.e., eliminate or reduce the 20% excise tax to the employee and the disallowed deduction to the employer).  And as always, FREE continuing education credits may apply.

The purpose of this post is to highlight compensatory action items that publicly-traded issuers should consider this proxy season.  Such considerations include:

  • Chase the Say-on-Pay Vote.  The most common reason for a negative recommendation from ISS is a perceived pay-for-performance disconnect within the compensation structure.  Robust disclosure on this point can help, especially disclosure that clarifies why certain performance criteria were used and explains the degree of difficulty associated with achieving target performance.
  • Consider an Annual Equity Grant Policy.  Some issuers grant equity awards to executive officers based upon an initial dollar amount that is then converted into shares.  If such an issuer has a depressed stock price due to market volatility, then the conversion formula will result in the award having more shares (compared to the situation where the issuer’s stock price had not fallen).  Is the issuer ripe for an allegation that the executives are timing the market because equity was granted at a low stock price for the sole purpose of receiving a larger number of shares?  To help defend against such a question, issuers should consider having a documented annual equity grant policy.  The policy could be formal or informal (with the latter being clearly presented in the CD&A of the issuer’s proxy statement). Continue Reading Compensatory Action Items to Consider this Proxy Season

Employment agreements between publicly-traded issuers and their executive officers often contain severance pay provisions that are heavily negotiated at the time of entering into the agreements.  The purpose of this post is to consider whether the amount of contractually-provided severance pay could, over the employment term, be reduced proportionate to the increase in the executive’s wealth accumulation over the same time period (i.e., an inversely proportional relationship between the amount of severance pay and the amount of wealth accumulation by the executive over the employment term). Continue Reading Should Contractually-Provided Severance Pay Decrease as Wealth Accumulation Increases?

As we head into a new proxy season, we would like to invite you to attend our annual FREE webinar entitled “Upcoming Proxy Season: Compensatory Thoughts from ISS,” which will be held on Thursday, January 17, 2019 from 10:00 am to 11:00 am Central.  As always, continuation education credits are available.

For your convenience, our remaining 2019 monthly webinar program is as follows: Continue Reading Upcoming Proxy Season: Compensatory Thoughts from ISS