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Presenting a live 90-minute webinar with interactive Q&A

Executive Compensation Tax Issues in M&A:

Navigating IRS Rules for Stock Options,

Deferred and Equity Comp, Golden Parachutes

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, JULY 6, 2017

Erica Schohn, Partner, Skadden Arps Slate Meagher & Flom, New York

Gavin A. White, Partner, Skadden Arps Slate Meagher & Flom, New York

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EXECUTIVE COMPENSATION, EMPLOYEE BENEFITS AND TAX

ISSUES IN CORPORATE M&A TRANSACTIONS

Erica Schohn

Skadden, Arps, Slate,

Meagher & Flom LLP,

New York

Presented by

Gavin White

Skadden, Arps, Slate,

Meagher & Flom LLP,

New York

M&A TIMELINE

1. Pre-Signing

2. Post-Signing/Pre-Closing

3. Closing

4. Post-Closing

6

1. PRE-SIGNING

7

1. PRE-SIGNING

A. Structuring the Deal

B. Conducting Diligence

C. Negotiating the Transaction Document

D. Considering Retention/Employment Arrangements

8


9

1. PRE-SIGNING

Transaction generally may be structured as a stock purchase/reverse

subsidiary merger or asset acquisition and may be taxable or tax-free

Treatment of target’s outstanding equity awards

In stock acquisitions, outstanding equity awards are usually

assumed/substituted; more rarely, cashed out and canceled

In an asset transaction, outstanding awards generally remain subject to the

seller’s equity plan, and there is a termination of employment of seller’s

employees for purposes of equity plan

Employees generally are given a specified period post-closing in which to

exercise stock options; other awards generally terminate upon the termination of

the employees’ employment at the closing of the transaction.


10


1. PRE-SIGNING

The most common types of awards that may be outstanding at target

include:

Stock options: A right to purchase shares of company stock at a specified

price, generally referred to as the “exercise price”

Stock appreciation rights (SARs): A right to receive a cash payment based

on the excess, if any, of the value of company common stock on the

exercise date over the value of the stock on the grant date

Restricted stock: Grant of shares of company stock subject to vesting

restrictions

Restricted stock units (RSUs): The right to receive a share of stock (or

cash value of a share of stock) upon vesting or a later date

11

Considerations for determining treatment of equity awards:

business decisions/use of cash

dilution of acquiror’s shareholders

prevalence of out-of-the-money options

ability to achieve retention benefits through continuation of awards

terms of the applicable equity compensation plans

legal compliance issues raised in diligence

legal limitations (e.g., consent requirements, substitution limitations)

Section 280G golden parachutes and potential gross-ups

administrative burden considerations: equity tracking, employee communications, accounting, SEC

registration

international compliance

1. PRE-SIGNING

A. Structuring the Deal: Treatment of Equity Awards

12

1. PRE-SIGNING

Determine type and scope of outstanding equity awards; identify key holders and

terms of outstanding grants (e.g., vested versus unvested)

Determine whether the underlying equity plan permits or frustrates the proposed

treatment of outstanding awards

Assumption or substitution of equity awards permitted?

Cash out of outstanding awards permitted?

Acceleration required?

Ability to cancel awards without consent, particularly out-of-the-money options?

Notice requirements and/or ability of option holders to exercise?

If the desired treatment is not permitted under the terms of the equity plan, the

target may need to obtain consents from award holders prior to the closing


13

1. PRE-SIGNING

Determine whether treatment of equity awards should vary by type of equity award,

holder or based on vested status or exercise price (compared to per share price

applicable in the transaction)

Should options, SARs, restricted stock and RSUs be treated differently (e.g., one or more types

of the target’s outstanding equity awards may be inconsistent with acquiror’s employee equity

program)?

Should employee-held equity awards be treated differently from awards held by non-employee

directors/consultants?

Should certain key employee equity awards be treated differently than equity awards held by

employees generally? Does the plan allow for such disparate treatment?

Should vested and unvested stock options be treated differently?

If permitted by the terms of the applicable target plan, should in-the-money stock options be

treated differently from out-of-the-money options?


14

1. PRE-SIGNING

Review of Section 409A

Section 409A of the Internal Revenue Code governs the timing of elections to defer compensation, the timing of distributions of deferred compensation and the reporting and taxation of deferred compensation.

Amounts are generally considered to be deferred if an individual obtains a legally binding right in one tax year to receive compensation in a later tax year.

A violation of Section 409A may result in immediate inclusion in income of the vested deferred amounts and penalty taxes and interest to the employee and may also result in penalties for reporting and withholding violations by the service recipient company.

A. Structuring the Deal: Equity/409A Considerations

15

1. PRE-SIGNING

Cash out of options and SARs generally do not violate Section 409A

Canceling stock options and SARs in exchange for an immediate cash payment that is

equal to the excess of the per share transaction price over the applicable exercise price

should not violate Section 409A

Earnouts and escrows should be structured to comply with Section 409A

Section 409A provides an exemption for “earnout” payments or payments otherwise held back

from payment upon closing, so long as the earn-out is paid on the same schedule and on the

same terms and conditions as payments are made to target shareholders generally and the

amount is paid out fully within five years after the change of control

Practitioners take view that cashing out out-of-the-money stock options for a specified

price is also permitted under the rules of Section 409A

Cashing out unvested options and paying proceeds out over time (e.g., in accordance

with the original vesting schedule) raises issues under Section 409A. Converting options

into restricted stock units likewise raises issues under Section 409A

A. Structuring the Deal: Equity/409A Considerations

16

1. PRE-SIGNING

Restricted stock is excluded from Section 409A

Taxation generally: No recognition of income at the time of grant. Employee recognizes ordinary income when shares no longer "subject to a substantial risk of forfeiture" equal to the then-current value of stock. But Section 83(b) election possible.

RSUs may be subject to Section 409A

Taxation generally: No recognition of income at the time of grant. Upon settlement, employee recognizes ordinary income equal to the aggregate value of the award as of the settlement date.

Stock options and SARs are excluded from Section 409A if certain requirements are met

The awards must have been granted with an exercise price that is at least equal to the fair market value of the underlying shares as of the date of grant

Awards must be for the common stock of the employer receiving the services (or a parent of the employer)

A. Structuring the Deal: Equity/Tax/409A Considerations

17

1. PRE-SIGNING

Taxation of non-qualified stock options and SARs

No recognition of income at the time of grant or vesting.

Upon exercise, employee recognizes ordinary income equal to the excess of the fair market value of the shares received over the exercise price (or in the case of SARs, the excess of the fair market value of the shares at the time of grant over the fair market value at the time of exercise).

Taxation of incentive stock options (ISOs)

No recognition of income at the time of grant, vesting or exercise.

If shares acquired upon exercise are held for at least two years from the date of grant and at least one year from the date of exercise, employee recognizes capital gain or loss upon a subsequent sale of the shares.

If shares disposed of prior to expiration of either such period (a "disqualifying disposition"), employee recognizes ordinary income at the time of such disposition equal to the excess of (A) the lesser of (i) the fair market value of the shares of stock acquired on the date of exercise or (ii) the amount realized upon the disposition over (B) the exercise price.

A. Structuring the Deal: Equity/Tax/409A Considerations

18

1. PRE-SIGNING

Incentive stock options

In being assumed, ISOs must meet the requirements under Section

424 in order to preserve their status.

Accelerating the vesting of ISOs may have the effect of disqualifying

the options if the $100,000 per year limitation on the aggregate fair

market value of the stock on which ISOs are exercisable for the first

time by any individual during any calendar is exceeded.

Cashing out ISOs as part of an acquisition results in ordinary income to

the employee and a corresponding deduction to the employer.

A. Structuring the Deal: ISOs

19

1. PRE-SIGNING

Assumption of options and SARs must be structured to preserve the

aggregate spread in order to comply with Section 409A

Assumed awards are usually not exchanged on a 1:1 basis in shares of the

acquiror; rather, an exchange ratio is used to adjust the awards.

Options and SARs may generally be exchanged and adjusted for

equivalent rights in a transaction and will not violate Section 409A so long

as the aggregate spread on the options or SARs is preserved.

Exchanging options or SARs for another form of compensation or the use

of escrows and earnouts requires additional analysis and considerations.

A. Structuring the Deal: Option Assumption

20

1. PRE-SIGNING

“Rollover” of options/SARs

Consider both ISO and 409A rules, which are very similar

Options may be “in the money” immediately after closing and exempt from

Section 409A and comply with the ISO rules if the rollover would comply with

Section 424 (i.e., no increase in the aggregate value of the spread or the per

share ratio of exercise price to share price)

Transaction must be a “corporate transaction” (as defined in Reg. § 1.424-

1(a)(3))

A corporate merger, consolidation, acquisition of property or stock, separation,

reorganization or liquidation

A distribution (excluding ordinary dividends) or change in terms in number of

outstanding shares

Conversion is permitted in a spin-off but not a carve-out IPO


21

1. PRE-SIGNING

The Section 409A exchange ratio test is similar to the ISO rules but more permissive

The Section 409A test is satisfied if the ratio of the exercise price to the fair market value of a share subject to the option immediately after the assumption or substitution is not greater than the ratio of the exercise price to the fair market value of a share subject to the option immediately before the assumption or substitution

Like the ISO rules, the Section 409A rules require that the aggregate spread value not be increased

But Section 409A allows an acquiror to “de-leverage” the equity position of employees by lowering the ratio of exercise price to stock value and thus rollover with respect to fewer shares

This may be helpful to address limitations under the NYSE or NASDAQ 20% shareholder approval rule


22

1. PRE-SIGNING

Escrows and earn-outs may raise special concerns as to the value

on which the rollover occurs

Example:

Target is being acquired for $10 per share in cash

20% of the purchase price is being placed in an escrow as security for

Acquiror’s claims for any breaches of target representations and

warranties

Acquiror’s stock is trading at $20 per share

Acquiror is assuming outstanding target options and substituting

Acquiror’s stock for target stock

A. Structuring the Deal: Escrows/Earnouts

23

1. PRE-SIGNING

To comply with Reg. § 1.409A-1(b)(5)(v)(D), the option exchange ratio

must not increase the aggregate spread in the option being assumed

For purposes of applying this test, should target stock be valued at:

$10 per share?

$8 per share?

Somewhere in between?


24

1. PRE-SIGNING

There are at least 3 schools of thought on how to answer this question:

The traditionalist school – we never had to worry about escrows for ISO purposes under

Section 424(a), why start now? -- use $10 per share

The worrywart school – Section 409A is a whole new ballgame so better safe than sorry –

use $8 per share

This could be coupled with a cash payment and/or reload option when and if the escrow is

paid

But…reload options must have a fair market exercise price when granted

The pragmatist school – it is a question of fact not law – get an appraisal

Appraisal would not necessarily be a typical valuation exercise; rather it would involve risk

analysis as to likelihood of indemnities being triggered

This should be an issue only with private target companies

In addition, remember that any payments from the escrow/earn-out payments

made to former holders of options, restricted stock, RSUs, SARs, etc. will be taxed

as ordinary income (and not as capital gain) upon receipt and will also be subject to

withholding taxes


25

1. PRE-SIGNING

RSUs and Section 409A

RSUs are subject to Section 409A unless there is an applicable exemption

(e.g., short-term deferral where the RSUs are settled at, or within a limited

period following, vesting)

Typically, where unvested RSUs are being assumed pursuant to the same

vesting terms or cashed out in a transaction, such treatment does not

violate Section 409A

However, additional analysis is required if the target’s RSUs are subject to

Section 409A and the target’s equity plan permits the exercise of discretion over

the treatment of RSUs

A. Structuring the Deal: Equity/Section 409A Considerations

26

1. PRE-SIGNING

Cash-out of Options

Generally Section 83 and 162 rules govern timing of deduction of cash-out

of options except for ISOs

Under these rules, deduction would be taken by target at closing

But Next-Day Rule: Reg. § 1.1502-76(b)(i)(ii) may move deduction to

acquiror return

Spin-off

Revenue Ruling 2002-1

In spin-off context, deduction “relates back” to when the compensation plan

entered into

Who was employer at grant?

A. Structuring the Deal: Who gets the deduction?

27

1. PRE-SIGNING

If target gets the deduction, it can generally be used to offset the

current year's income, then carried back 2 years, and any balance can

be used to offset future income (subject to Section 382 and other

limitations)

Can the parties agree in the acquisition agreement whether target or

acquiror will claim the deductions?

Can the parties allocate the tax benefits from the deductions between target

and acquiror (i.e., the deductions create a net operating loss (NOL) carry

forward and acquiror must pay the target shareholders all or a portion of the

tax refund attributable to the use of the NOL when received)

A. Structuring the Deal: Who gets the deduction?

28


29

1. PRE-SIGNING

General Transaction Principles and Section 409A

Types of Employee Arrangements

Change in Control and Employment Agreements; Severance Plans

Equity Compensation Plans

Cash Incentive Plans

Nonqualified Deferred Compensation Plans

Retirement, Health and Welfare, and Retiree Medical Plans

Considerations Under Section 280G


30

1. PRE-SIGNING

General Transaction Principles and Section 409A

In a stock purchase/merger transaction, an acquiror generally assumes (directly or

indirectly through the surviving entity) employee plans and agreements automatically

by operation of law. Generally, plans are not assumed in an asset purchase

transaction but it is not uncommon for certain specified employment agreements to be

assumed by the acquiror or for assets and liabilities relating to transferred employees

under certain plans to be assumed.

Benefits may become payable, accelerate or become enhanced by reason of an

acquisition.

Single Trigger: a payment that is triggered upon only the occurrence of a change in control

Double Trigger: a payment that is triggered by a change in control and a subsequent qualifying

termination of employment, such as a termination by the company without Cause or by an

individual for Good Reason

Has the target violated Section 409A?


31

1. PRE-SIGNING

General Transaction Principles and Section 409A (cont’d)

The Section 409A definition of change in control must be used where:

A change in control is a payment trigger for deferred compensation, or

A change in control is used to toggle a different form of payment (e.g., lump sum

v. installments) upon a “separation from service” within a specified amount of

time following a change in control


32

1. PRE-SIGNING

Types of Employee Arrangements:

Change in Control (“CIC”) and Employment Agreements; Severance Plans

Determine if any payments (including any transaction bonuses) will be triggered on a change in control (single trigger)

Determine the severance protections to be triggered on a change in control and subsequent termination and the timeframe of such protections

Determine whether the change in control triggers a walk away right or otherwise gives significant flexibility under a Good Reason definition

A Good Reason definition that gives the individual too much flexibility to determine the timing of triggering severance may subject the agreement to Section 409A

Examine any restrictive covenants


33

1. PRE-SIGNING

Types of Employee Arrangements (cont.):

Equity Compensation Plans

Determine whether the plans require or permit accelerated vesting of unvested equity or

accelerate the payment of equity awards in a change in control

Determine if any equity awards are subject to Section 409A

As previously discussed, determine whether the plans permit assumption or cash out, and

whether consent of the individual equity award holders will be required

As previously discussed, the assumption of equity awards must be structured to comply

with plan terms, Section 409A and ISO rules, if applicable

Cash Bonus Plans

Transaction bonus, annual cash incentive and commission-based plans

Review bonus/incentive plans for purposes of determining whether, based on transaction

structure, such plans will remain in place after the transaction or will need to be modified or

replaced

Determine whether the plans provide for accelerated vesting or payment of awards, in

whole or in part, in connection with a change in control


34

1. PRE-SIGNING


Nonqualified Deferred Compensation Plans

Include supplemental retirement plans or excess benefit plans

Determine whether the plans provide for accelerated vesting or distribution in connection with a change in control

If the plans provide that amounts will be paid upon a change in control, the definition must comply with Section 409A

Determine whether there has been a trust established in connection with the plan and whether a change in control triggers the funding of these benefits

Section 409A permits the distribution of amounts under a plan in connection with the termination of the plan within the 30 days preceding or the 12 months following a change in control, but only if all arrangements of the same plan aggregation type are terminated with respect to all participants who experienced a change in control, and distributions are made within 12 months of such termination.


35

1. PRE-SIGNING


Retirement, Health and Welfare, and Retiree Medical Plans

Determine the type of retirement plans in place at target (i.e., defined contribution or

defined benefit) and that all relevant documentation has been provided with respect to

each

Determine whether there are any potential liabilities associated with the retirement plans,

such as underfunding of a pension plan or withdrawal liabilities in connection with a

multiemployer plan

Determine the health and welfare plans that are maintained by the target and confirm

compliance with applicable laws (e.g., the Patient Protection and Affordable Care Act)

Determine whether the target self-insures its medical coverage and associated liabilities,

as well as whether it maintains stop loss coverage

Determine whether the target provides retiree medical benefits or has ongoing life

insurance obligations to individuals


36

1. PRE-SIGNING

Considerations under Section 280G

Applies to payments made to “disqualified individuals” that are contingent on a change in ownership or control of a corporation, a change in the effective control of a corporation or a change in the ownership of a substantial portion (generally 1/3) of a corporation’s assets.

Note that these rules generally don’t apply to partnerships and LLCs

Any payment made pursuant to an agreement entered into within one year before a change in control is presumed to be contingent on that change in control, i.e., parachute payments.

“Disqualified individuals” include officers, certain shareholders or a group of highly-compensated individuals determined pursuant to a formula.

B. Conducting Diligence: 280G

37

1. PRE-SIGNING

Calculating excess parachute payments as a function of base compensation

An excess parachute payment is the amount by which the parachute payments exceed the

average taxable compensation received by an executive from the company during the

5 preceding years, which is the individual’s base compensation

Lost tax deduction to corporation and excise tax on individual (subject to

required withholding by corporation) in the event excess parachute payments

equal or exceed three times base compensation

If the parachute payments equal or exceed 3x the individual’s base compensation,

Section 280G provides that no deduction is allowed to a corporation for excess parachute

payments (i.e., everything in excess of 1x base compensation) and Section 4999 imposes

an excise tax on the recipient of any excess parachute payments, equal to 20% of such

amount


38

1. PRE-SIGNING

Employment arrangements may include one of the following types of

provisions relating to Section 280G:

Haircut provision: payments must be reduced to a level that would not trigger

the excise tax

Better-of provision: payments are cut back to a level that would not trigger the

excise tax unless the individual would be in a better economic position (on an

after-tax basis) in receiving all amounts and simply paying the excise tax

Gross-up provision: an additional payment to the individual to make the

individual whole for any excise tax triggered by excess parachute payments


39

1. PRE-SIGNING

Examples of parachute payments:

Severance payments and the value of health benefits to be paid or provided

under an employment, change in control or severance arrangement

Transaction bonuses or accelerated annual bonuses

Value of accelerating the vesting of equity awards or the cash out of unvested

awards

Additional benefits under nonqualified deferred compensation plans


40

1. PRE-SIGNING

Examples of payments that are generally exempt from being parachute payments:

Payments that are not in the nature of compensation (e.g., payments in respect of vested shares held by the individual)

Payments to be paid with respect to stock options already vested at the time of the change in control

Any portion of a parachute payment that is attributable to the performance of services before the change in control

Reasonable compensation for personal services to be rendered after the change in control or payments made pursuant to an agreement entered into after the change in control (as compared to pre-change in control compensation for services)


41

1. PRE-SIGNING

Private company shareholder approval exemption – a change in control-

related payment will not be a parachute payment if shareholder approval

of the payment is obtained in accordance with the rules

Shares held by executives whose payment is subject to the vote may not vote their shares

75% of the shares entitled to vote (on a date within six months before the change in control) must approve the payment

Adequate disclosure of all material facts concerning all parachute payments must be made to all shareholders (include individual quantification)

The vote must determine the right of the individual to receive or retain the payment (no agreement to pay anyway)

The vote must be separate from the shareholder vote to approve the transaction


42

1. PRE-SIGNING

Common technique

Employees waive their rights under existing agreement and enter into new

agreements, which are effective only if shareholder approval is obtained

Can target arrangements be converted into “reasonable compensation”?

Allocation to non-compete

Reasonable compensation conversion and non-compete allocation approaches became more challenging post-2003

Final 280G regulations 8/4/03

Square D case (Tax Court 2003) – discredited Pearl Meyer testimony

relating to characterization of executives’ compensation

Section 409A challenges?

B. Conducting Diligence: 280G Approaches

43


44

1. PRE-SIGNING

Compensation and benefits provisions include:

Mechanics surrounding the treatment of outstanding equity awards

Representations and Warranties

Copies of all employee benefit plans have been provided

Employee benefit plans are and have been operated in compliance with their terms, ERISA, the Internal Revenue Code and other applicable laws

No claims or suits against any employee benefit plan

No plans provide for any payments or for the acceleration of vesting/payment, trigger golden parachute excise taxes or are required to be funded, on account of the deal or in tandem with another event

Foreign benefit plan representations and compliance


45

1. PRE-SIGNING

Compensation and benefits provisions include (cont’d):

Interim Operating Covenants

Without the consent of the acquiror, target may not increase compensation or benefits,

grant bonuses, severance pay or equity awards, establish/amend/terminate benefit plans,

etc.

Post-Closing Covenants

Common covenants include that acquiror agrees to: maintain comparable compensation

and benefits for a specified period, provide service credit to target employees and maintain

severance arrangements for a specified period, etc.

Consider whether any carve-outs from comparable benefits continuation are warranted (e.g.,

equity compensation, defined benefit pension benefits)

Disclosure Schedules

Review and update seller’s exceptions and qualifications to the terms of the transaction

document. Careful attention is warranted.


46


47

1. PRE-SIGNING

Identify key employees critical to retain and the length of retention period

needed for each

Review adequacy of, and issues with, existing employment and retention

arrangements

Unique treatment of key employee equity awards

Determine whether to negotiate new retention awards or offer letters with key

employees, including modifications to existing arrangements (and the timing

for such arrangements)

Section 409A issues with modifications/conversion into new arrangements

Determine whether any employees should be terminated in connection with the

closing and the terms of any termination arrangement

* Identification of key employees and effective communication

to affected employees is critical


48

1. PRE-SIGNING

Section 409A may limit the ability convert severance arrangements into

new consulting, retention or non-competition arrangements

Conversion was way of converting the imminently payable compensation

(because of change in control or separation) into compensation that is

subject to a substantial risk of forfeiture

Section 409A does not recognize non-compete payments as being subject

to a substantial risk of forfeiture

Substitution rules – Any amount, or entitlement to any amount that acts

as a substitute for, or replacement of, NQDC amount constitutes a

payment of NQDC under Section 409A


49

1. PRE-SIGNING

There still may be ways to do this

Severance agreements which fit into the short-term deferral exemption

under Section 409A can be converted

… but beware of agreements with loose Good Reason definitions

However, payments that vest on a change in control may be modified

to extend vesting beyond the change in control, if the extended vesting

condition would constitute a substantial risk of forfeiture

Asset sales may permit distribution as separation from service


50

1. PRE-SIGNING

If Company has Section 409A subject deferred compensation, can you pay out

at the CIC if not provided for in the document?

Section 409A permits the termination of an NQDC plan within the 30 days

preceding or the 12 months following a change in control event but only if all

aggregated plans, agreements, etc. sponsored by the company immediately

after the change in control event that apply to each participant experiencing the

change in control event are terminated

Action to be taken by the service recipient that is primarily liable immediately after

the transaction for the payment of the NQDC

Balances must be paid under all aggregated plans within 12 months of the date the

service recipient takes the action to terminate the plan

For aggregation, these types of plans are generally “account balance” or “non-

account balance” plans for purposes of Section 409A


51

2. POST-SIGNING/PRE-CLOSING

52


Proxy Statement or Information Statement prepared by Seller for its shareholders to vote on the proposed deal; relevant provisions:

Interest of Certain Persons section

Golden Parachute Compensation disclosure relating to Seller’s named executive officers as part of any disclosure required by Item 401(t) of Regulation S-K under the Securities Exchange Act of 1934.

For private targets, reviewing any Section 280G-related materials prepared by Seller in connection with Seller shareholder vote

Finalizing any employment arrangements to be executed at or prior to, but contingent upon, the closing of the transaction

53


NASDAQ and NYSE listing rules may require shareholder

approval in connection with the assumption of equity plans

If an acquiror assumes a target’s plan for purposes of granting future

awards under the plan, the acquiror may need to obtain approval by its

shareholders for such assumption.

Such shareholder approval would not generally be required if awards under

the assumed plan would not be granted to individuals who were employed

by the acquiror at the time of transaction.

Looking ahead to necessary regulatory filings

Form 3/Form 4 filings

Form S-8 filing for assumed equity awards

54

3. CLOSING

55

3. CLOSING

Execution of employment agreements (if not executed pre-closing)

Employee equity awards are cashed-out or assumed

Employee communications regarding equity award treatment and specific

award conversions

Looking ahead to post-closing matters

Employee transition

Maintenance or termination or target benefit plans

Employee reductions and communications relating to such reductions

56

4. POST-CLOSING

57

4. POST-CLOSING

Ongoing compliance with post-closing covenants in the

transaction agreement

Form 3 and Form 4 filings by Section 16 officers of the Seller

Section 16 officers of the Seller to make Form 3 and/or Form 4 filings

regarding their changes in beneficial ownership of securities in connection

with either an assumption or cash out of equity awards in the transaction.

To be filed within two days after the closing of the transaction

58

4. POST-CLOSING

Form S-8 Requirements in Connection with the Assumption of Equity Awards

Acquiror must register the shares underlying assumed equity awards on Form S-8 (but no registration of shares required for substituted awards)

Requires consent from auditor(s)

Legal and registration fees will be incurred

Timing of filing depends on assumed equity awards (e.g., if only unvested options are assumed, the Form S-8 must be filed prior to the time that an assumed option is exercised)

Employees of the target could be anxious if required to wait for a Form S-8 to be effective in order to exercise options

Acquiror must distribute to holders of assumed awards a prospectus pursuant to Section 10(a) of the Securities Act of 1933, which summarizes the terms of the applicable plan and certain tax implications.

59

Erica Schohn’s practice focuses on compensation and benefits arrangements in U.S. and cross-border

corporate transactions (including mergers and acquisitions, public offerings and bankruptcy reorganizations), the

negotiation of executive employment and severance arrangements, and the drafting and implementation of

equity and other compensation programs.

Ms. Schohn frequently advises clients on the U.S. Securities and Exchange Commission (SEC) rules governing

executive compensation disclosure and corporate governance matters relating to compensation practices. As part of

this practice, Ms. Schohn is a member of panels and committees comprised of leading government and private- and

public-company governance professionals, and she speaks regularly with representatives from the SEC, stock

exchanges, institutional investor groups and proxy advisory firms on the latest issues in corporate governance.

Ms. Schohn also regularly advises clients regarding tax planning with respect to compliance with Internal

Revenue Code Section 409A and the tax rules relating to deferred compensation, the excise tax on excess

parachute payments, and limits on the deductibility of executive compensation.

Ms. Schohn is the author and editor of the Section 409A Handbook, published by Bloomberg BNA, and speaks

at seminars on issues relating to executive compensation, tax planning and corporate governance. Ms. Schohn

also was selected for inclusion in Chambers USA 2015 and 2016.

Erica Schohn Skadden, Arps, Slate, Meagher & Flom LLP

New York, NY

212.735.2823 | [email protected]

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Gavin A. White Skadden, Arps, Slate, Meagher & Flom LLP

New York, NY

212.735.3418 | [email protected]

Gavin A. White advises clients on a wide variety of U.S. and international tax matters, including public and

private acquisitions, divestitures, bankruptcy reorganizations, equity and debt offerings, and joint ventures. Mr.

White serves as hiring partner for the New York office and is a member of the firm’s Diversity Committee.

Mr. White’s representative matters include: Sealed Air Corporation on its $3.2 billion sale of Diversey Care to Bain

Capital; CBS Corporation (as special REIT tax counsel) in the spin-off and REIT conversion of its subsidiary, CBS

Outdoor Americas Inc., and in the $644 million IPO of common stock of CBS Outdoor Americas; News Corporation

in its $950 million acquisition of Move, Inc.; Joh. A. Benckiser GmbH, a holding company based in Germany, as the

lead investor in its US$9.8 billion acquisition of D.E. Master Blenders 1753 N.V. (the Netherlands), a coffee and tea

producer; Danaher Corporation in its $13.8 billion acquisition of Pall Corporation, and in the US$2.6 billion merger of

its communications business with NetScout Systems, Inc.; Permira Funds (United Kingdom) in the $3.5 billion sale

of its portfolio company, Arysta LifeScience Limited (Ireland), to Platform Specialty Products Corporation, and in the

$2.8 billion sale of its portfolio company Iglo Foods Holdings Limited (United Kingdom) to Nomad Holdings Limited

(British Virgin Islands); Longview Asset Management, LLC in connection with the $8.7 billion acquisition of

PetSmart, Inc. by a consortium led by BC Partners (United Kingdom); Freescale Semiconductor, Ltd. and a private

equity consortium, including The Blackstone Group L.P., The Carlyle Group LP, Permira Funds (United Kingdom)

and TPG Capital, L.P., in Freescale’s $11.8 billion acquisition by NXP Semiconductors NV (the Netherlands); and

NXP Semiconductors N.V. on its $47 billion acquisition by Qualcomm Incorporated.

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