EXECUTIVE COMPENSATION

Transcription

1 EIGHTH ANNUAL ADVANCED ALI-ABA COURSE OF STUDY EXECUTIVE COMPENSATION STRATEGY, DESIGN AND IMPLEMENTATION EQUITY COMPENSATION June 23-24, 2005 New York Palace Hotel New York Materials Submitted By: Scott P. Spector Fenwick & West LLP Mountain View, California

2 INTERNAL REVENUE CODE... 1 I. TRANSFERS OF PROPERTY TO SERVICE PROVIDERS... 1 A. General Rules Under B. Transfer Requirement... 2 C. Definition of Property... 3 D. Forfeitability and Transferability... 4 E. Valuing Property... 4 F. Amount Paid for Property... 5 G. Section 83 and Options... 6 H. Transfers by Shareholders... 7 II. INCENTIVE STOCK OPTIONS... 9 A. Income Tax Consequences... 9 B. Requirements for ISO Status and Treatment C. ISOs and Corporate Transactions III. EXCLUSION FOR GAIN FROM CERTAIN SMALL BUSINESS STOCK A. General B. Qualified Small Business Stock C. Post Issuance Requirements D. Trade of Business Requirements E. Section 1045 Rollovers IV. CHANGE IN CONTROL PAYMENTS A. Introduction to Section 280G B. Base Amount and Base Period C. Disqualified Individuals D. Contingent Upon a Change in Ownership or Control E. Parachute Payment Strategies V. DEDUCTION LIMIT FOR EXECUTIVE COMPENSATION A. In General B. Compensation Paid as Commissions C. Performance Based Compensation D. Companies That Become Publicly Traded VI. SECTION 409a TREATMENT OF EQUITY AWARDS AS DEFERRED COMPENSATION A. In General B. Treatment of Equity Awards Q&A 4(d) C. Fair Market Value Options Q&A-4(d)(ii) D. Special Unanswered Option Questions Q/A 4(d)(ii) and (iv) E. Grandfathered Awards Q/A 16 & i-

3 (continued) F. Issues Arising in Mergers & Acquisition Transactions VII. EQUITY-BASED COMPENSATION IN PARTNERSHIPS AND LLCs A. LLCs As Partnerships B. Capital Interests and Profits Interests C. Taxation of Capital Interests D. Taxation of Profits Interests E. Unvested Capital or Profits Interests F. General Concerns Regarding Equity Grants in Partnerships and LLCs NONTAX LEGAL ISSUES VIII. EXEMPTIONS AND REGISTRATIONS UNDER THE 1933 ACT A. Rule B. Rule 701 Exempt Offerings Pursuant to Compensatory Arrangements C. Form S-8 Registration Statement IX. SECTION 16 AND RULE 16b A. Section 16 Overview B. SEC Rule 16b-3 Overview C. Transactions Exempt by Their Nature Under Rule 16b D. Transactions Exempt by Approval Under Rule 16b E. Section 16 Reports F. Electronic Filing and Website Posting Requirements for Section 16 Reports X. OPTION EXCHANGE PROGRAMS A. Introduction B. Straight Repricing C. Restricted Stock Awards D. 6&1 Exchange Program E. Buyout of Options with Cash F. Accounting Issues G. Securities and Disclosure Issues H. Other Factors To Be Considered For A Repricing/Replacement Program XI. EQUITY COMPENSATION PLAN DISCLOSURE A. Introduction B. Reasons for rules C. Required Tabular Disclosure D. Required Narrative Description of Non-Security Holder Approved Plans E. Required Filing of Non-Security Holder Approved Plans F. Form 8-K Filings XII. STATE CORPORATE LAW ii-

4 (continued) XIII. STOCK EXCHANGE REQUIREMENTS A. New York Stock Exchange B. NASDAQ XIV. SARBANES-OXLEY ACT OF A. Prohibition on Personal Loans by Directors and Executives B. Law Firm Memorandum iii-

5 INTERNAL REVENUE CODE I. TRANSFERS OF PROPERTY TO SERVICE PROVIDERS A. General Rules Under Section 83 governs the income tax treatment of the transfer of property in connection with the performance of services. It is the operative income tax provision in connection with the award and vesting of restricted stock, the exercise of nonqualified stock options, the issuance of shares under a stock purchase plan that does not satisfy 423 and the exercise of stock appreciation rights that are settled with shares of stock or other property. Note that Section 83 applies to any transfer in connection with the performance of services and it does not matter whether such services are performed by an employee, a consultant, a natural person or an entity. a. As a general rule, a service provider recognizes ordinary income on account of the transfer of property on the first date that the property is either transferable or no longer subject to a substantial risk of forfeiture. The ordinary income that is recognized is equal to the difference between the fair market value of the property at that time and any amount paid for the property. 83(a). (1) Section 83 can apply to the transfer of property even though the amount paid by the service provider is the property s fair market value. Alves v. Commissioner, 79 T.C. 864 (1982), aff d 734 F.2d 478 (9 th Cir. 1984). (2) Section 83 can apply to the transfer of property even though the service provider is not an employee of the transferor. Reg (f). b. Notwithstanding the general rule, a service provider may elect to have his income tax consequences determined as of the date that the property is transferred. This is accomplished by filing an election under 83(b). The ordinary income that is recognized in that event is equal to the difference between the transfer-date fair market value of the property and the amount paid for the property. 83(b). A service provider may want to make the election if he paid fair market value for the property or if he expects that its value will appreciate substantially during the period that 83 otherwise would postpone the tax date. (1) The election is irrevocable and must be made within thirty days of the date that the property is transferred. Reg (f) and Reg (b). However, if the sale of the property and the election are both rescinded within the same tax year that the election was made, such a rescission will be permitted. PLR (Oct. 31, 1999). (2) The thirty day period may not be extended. For this reason, it is imperative that the service provider keeps track of the purchase date. (3) The election must be filed with the IRS and a copy must be furnished to the transferor and included with the service provider s tax return. The required content of the election is set forth in Reg (e). Filing by registered or certified mail with return receipt requested is the advisable way to prove filing. 1