This is a just a quick note that proposed Treasury regulations were issued under Section 162(m) that reverses a series of private letter rulings previously granted to UPREITs.  Under the proposed Treasury regulations, the $1mm deduction limitation under Section 162(m) would apply with respect to compensation that a publicly-traded REIT’s covered employee receives from an operating partnership for services he or she provided on behalf of such operating partnership.  The proposed Treasury regulation is applied by potentially disallowing a REIT’s distributive share of any compensation deduction arising from compensation the covered employee received from the REIT’s operating partnership.  As a result, at least from a Section 162(m) perspective, compensation paid to a covered employee by an operating partnership should now be vetted and analyzed at the REIT level.

A more detailed analysis of the proposed Treasury regulations was drafted over the holidays by my partners Kendal A. Sibley and George C. Howell, III in the attached Client Alert entitled “Unexpected Provision in Proposed Section 162(m) Regulations May Affect Compensation Deductibility for UPREITs.”

Other aspects of the proposed Treasury regulations will be set forth in upcoming posts!

The purpose of this Post is to help issuers prepare for the upcoming 2020 proxy season by providing a non-exhaustive list of certain compensatory issues/topics to consider.  To that end (listed in no particular order):


  • Background.  It is common for Compensation Committees to initially denominate an equity award as a dollar amount, and then convert such dollar amount into a number of shares immediately prior to the date the equity is granted (e.g., executive is to receive a number of shares equal to 20% of his/her base salary).  This approach could create unfavorable shareholder optics if, for example, a U.S.-wide economic downturn were to cause the stock price of the issuer to decline.  In such a situation, the  equity grant to a key employee would cover a larger number of shares than it would have covered had there been no economic slide.  The result is that a plaintiff-orientated shareholder could allege that the executives were timing the market by granting an equity award with an artificially high number of shares.
  • Solution to Consider.  If the issuer had an annual grant policy, then such could act as an affirmative defense to any allegation that the issuer was timing the market.


  • Problem with Underwater Stock Options.  The concept of an “underwater stock option” occurs when the exercise price of an option is greater than the fair market value of the underlying stock.  In such a situation, the stock option is considered outstanding for purposes of the issuer’s burn rate calculation even though the stock option might not be serving its purpose from the perspective of the optionee.  And repricing the underwater stock option is not likely a viable solution because a repricing would likely trigger the SEC’s tender offer rules if a value-for-value exchange were sought by the issuer (i.e., a value-for-value exchange is typically sought in order to negate incremental compensation expense for accounting purposes).
  • Possible Going Forward Solution Is to Implement a Stock-Price Forfeiture within the Granting Documentation.  The foregoing issues could be avoided if the stock option had a stock-price forfeiture provision contained within the forfeiture provisions of the stock option documents (e.g., if the stock price falls to a certain price, then the stock option is automatically forfeited).  A stock-price forfeiture provision could avoid the time and expense associated with repricing underwater stock options because the issuer could simply grant new stock options in normal course following the stock-price forfeiture provision being triggered (but make sure such does not trigger the cancellation/regrant provisions of NYSE and NASDAQ listing rules because, if such is triggered, the forfeiture followed by a regrant could be deemed a repricing subject to shareholder approval).
  • More Information.  For more information, please see our prior Post “Tip of the Week: Could a Stock-Price Forfeiture Provision Eliminate the Existence of Substantially Underwater Stock Options”.


  •  Alleviate Stress on the 5% Carve-Out to the Minimum 1-Year Vesting Requirement.  For issuers trying to curry points under ISS’s Equity Plan Scorecard, the “plan features” pillar has a requirement that, in order to get full points, the equity incentive plan must have a 1-year minimum vesting schedule for all equity awards (though a 5% carve-out exists such that 5% of the equity plan’s share reserve does not have to be subject to a 1-year minimum vesting schedule).
  • Separate Non-Employee Director Equity Plan.  There are two data points to keep in mind: first, it is common for non-employee directors to be granted fully vested stock awards in situations where they are compensated in arrears for services previously rendered, and second, the concept of an Equity Plan Scorecard does not apply to a non-employee director equity plan (i.e., no need to satisfy a 1-year minimum vesting requirement).  Therefore, having a separate equity plan for non-employee directors could relieve the stress on the 5% carve-out, thus allowing the issuer to preserve the 5% carve-out for other purposes such as new hires.


  • Consideration.  Consider whether all or some of a non-employee directors’ compensation should be approved by the shareholders (e.g., annual fees, compensation caps/limits, fixed formulas, etc.) in order to help protect the decisions of the non-employee directors with respect to their own compensation.  For more information, see “Discuss Director Compensation During the Fall 2018 Board Meetings“.


  • More Robust Narrative Disclosure Preceding the Director Compensation Table.  Consider having substantially more robust narrative disclosure proceeding the non-employee director compensation table of the proxy statement.  To that end, discussions with the Compensation Committee should include:
    • What is the philosophy associated with non-employee director compensation,
    • How is pay assessed,
    • What is the frequency of the assessment, and
    • What is the process associated with any benchmarking of non-employee director compensation.


  • Background.  The Tax Cuts and Jobs Act of 2017 eliminated the performance-based exception to the $1mm deduction limit and expanded the definition of “who” is subject to the $1mm deduction limit.  This means that, starting January 1, 2018, all compensation paid to a “covered employee” that exceeds $1mm will not be deductible.  And too, remember that covered employee status was expanded and now includes the CEO, the CFO and the next 3 most highly compensated executive officers who are disclosed in the company’s Summary Compensation Table.  Finally, the new rules require that once an executive is a covered employee, he/she will ALWAYS remain a covered employee.
  • Increase Compensatory Deductions by Limiting “Executive Officer” Status.  Only an “executive officer” is eligible to be an officer disclosed in the Summary Compensation Table.  So one way to mitigate “covered employee” status is for the Board to revisit which individuals are “executive officers” of the issuer (i.e., if the individual is not an executive officer, then he/she could never be a named executive officer on the Summary Compensation Table, and therefore, such individual could never be a covered employee that is subject to the $1mm deduction limitation).
  • Other Ideas to Increase Compensatory Deductions.  Other ideas consider with respect to covered employees include:
    • Implement a deferral program with future annual payouts to be less than $1mm.
    • Replace the standard 3- and 4-year vesting schedules with a longer schedule (not likely practical).
    • Move lump-sum severance obligations to installment payouts (e.g., only $1mm of a $4mm lump sum payout would be deductible if paid to a covered employee, but if the payout was structured over three years, then $3mm of the $4mm would be deductible).


  • Background.  Many equity plans have a provision that limits the net withholding rate to the minimum statutory rate (i.e., the supplemental rate of 22%).  Such was previously required in order to avoid liability classification for accounting purposes.  However, the Financial Accounting Standards Board changed the rule a few years ago and now allow net withholding to occur at the highest federal tax rate without triggering liability classification for accounting purposes.
  • Consider Whether to Amend the Equity Plan.  Consider whether to amend the equity incentive plan to allow for a higher net withholding rate.  Such amendment might require shareholder approval (depending upon the design of the amendment), but the upside is that any equity plan with liberal recycling provisions should enjoy a longer life expectancy associated with the share reserve.
  • More Information.  For more information, please see our prior Post “Tip of the Week: 4 Ideas to Ease Tax Obligations When Equity Awards Vest During a Blackout Period.”

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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