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Executive Compensation Tax Issues in Mergers and Acquisitions Navigating Tax Rules for Stock Options, Deferred and Equity Compensation, Golden Parachutes, and More Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. TUESDAY, APRIL 22, 2014 Presenting a live 90-minute webinar with interactive Q&A David A. Calder, Morgan Lewis & Bockius, Irvine, Calif. Gina L. Lauriero, Morgan Lewis & Bockius, New York Mims Maynard Zabriskie, Partner, Morgan Lewis & Bockius, Philadelphia

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  • Executive Compensation Tax Issues in Mergers and Acquisitions Navigating Tax Rules for Stock Options, Deferred and Equity Compensation, Golden Parachutes, and More

    Todays faculty features:

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

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    speakers. Please refer to the instructions emailed to registrants for additional information. If you

    have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

    TUESDAY, APRIL 22, 2014

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

    David A. Calder, Morgan Lewis & Bockius, Irvine, Calif.

    Gina L. Lauriero, Morgan Lewis & Bockius, New York

    Mims Maynard Zabriskie, Partner, Morgan Lewis & Bockius, Philadelphia

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  • webinar

    Executive Compensation Tax Issues in

    Mergers and Acquisitions

    Mims Maynard Zabriskie

    David A. Calder

    Gina L. Lauriero

    April 22, 2014

    www.morganlewis.com

  • Morgan, Lewis & Bockius LLP

    Executive Compensation Tax Issues in

    Mergers and Acquisitions

    Introduction

    Planning for a change in control:

    Rationale for change in control arrangements

    Overview of potential issues

    Say on golden parachute pay

    Closing the deal:

    Deal structure

    Overview of issues

    Treatment of equity compensation

    Severance arrangements and other sources of potential unfunded liabilities

    Internal Revenue Code Section 409A

    Internal Revenue Code Section 280G

    Q&A

    6

  • Morgan, Lewis & Bockius LLP

    Executive Compensation Tax Issues in

    Mergers and Acquisitions

    Planning for a Change in Control

    7

  • Morgan, Lewis & Bockius LLP

    Purpose of Change in Control Provisions in

    Employment Agreements and Change in

    Control Agreements

    Goal is to balance the legitimate interests of both the

    executive and the employer

    Executive needs to be sure that there is some level of protection against a successor employer terminating the

    relationship or otherwise materially changing the business

    deal

    Employer needs to be sure that the change in control provisions dont negatively impact its ability to effectuate a

    change in control at an appropriate price

    8

  • Morgan, Lewis & Bockius LLP

    Change in Control Provisions in

    Employment Agreements and Change in

    Control Agreements

    Companies will often provide enhanced severance protection if a termination occurs upon or within one to two

    years after a change in control

    Severance multiple is often greater (e.g., two times

    compensation vs. one times compensation)

    Severance otherwise paid in installments is often paid in a

    lump sum

    All or a portion of outstanding equity awards vest

    9

  • Morgan, Lewis & Bockius LLP

    Reasons Companies Are Willing to Provide

    Change in Control Protection

    Benefits to the employer:

    Helps attract and retain qualified personnel

    Need to provide retention protection if the employer is a possible

    target company in a consolidating industry

    Change in control protection makes top management members neutral regarding acquisition offers and allows them to focus on

    the successful completion of the transaction

    Encourages key personnel to continue in employment through completion of a change in control

    Maximizes shareholder value by retaining key transition personnel

    Protects the company in the event the transaction is not completed

    10

  • Morgan, Lewis & Bockius LLP

    Employer Concerns in Providing

    Change in Control Protection

    Need to balance employer concerns:

    If the employer needs to deliver an intact management team, change in control terms should not give executives

    the incentive to leave upon closing

    Making executives too wealthy may reduce motivation after

    the closing

    Shareholder concerns

    Public companies will need to disclose arrangements in their

    annual proxy statements

    11

  • Morgan, Lewis & Bockius LLP 12

    Arrangements Addressing

    Change in Control Benefits

    Severance Plans and Agreements

    Enhanced severance

    Bonus Plans

    Accelerated vesting or payout

    Deferred Compensation Plans

    Accelerated vesting or payout

    Additional service credit under executive retirement plans

    Equity Compensation Plans

    Single-trigger or double-trigger vesting

    Assumption or cash-out of equity awards

  • Morgan, Lewis & Bockius LLP

    Triggering Events

    Single-Trigger

    Equity vesting upon the occurrence of the change in control

    Executive has the right to voluntarily quit on or following the change in control and receive change in control

    benefits

    Double-Trigger

    Executive will only receive change in control benefits upon a qualifying termination in connection with or within a

    specified period following the change in control

    13

  • Morgan, Lewis & Bockius LLP

    Employer-Initiated Termination Cause

    Defining Cause is a balancing act

    Executive wants to remove subjectivity to be sure only specific, objective events are included

    Employer wants to retain subjectivity to allow flexibility in light of uncertain circumstances

    Notice and cure periods

    Due-process right to Board review

    14

  • Morgan, Lewis & Bockius LLP

    Executive-Initiated Termination

    Good Reason

    Good reason essentially amounts to constructive

    termination without cause, and thus generally results in

    the same economics to the executive

    Successor employer should not be permitted to

    materially change the initial business deal (e.g., CEO

    becomes part of the janitorial staff)

    Notice and cure periods

    Section 409A considerations

    15

  • Morgan, Lewis & Bockius LLP

    Current Trends

    Limited group of executives covered by change in control

    arrangements

    Lower severance multiples

    Trending away from three times multiple

    Severance multiples of more than three times base salary plus target/average/last paid bonus are considered a

    problematic pay practice by ISS

    Shift to double-trigger

    16

  • Morgan, Lewis & Bockius LLP

    Current Trends

    Elimination of 280G gross-ups

    Addition of 280G best net provisions

    Clawbacks

    Impact of say on golden parachute payments

    17

  • Morgan, Lewis & Bockius LLP

    Disclosure of Change in Control Obligations

    Proxy/CD&A Disclosure

    Must describe severance and change in control benefits

    Must calculate value of benefits

    Must quantify any gross-ups on excess parachute payments (280G)

    18

  • Morgan, Lewis & Bockius LLP 19

    Shareholder Vote on

    Golden Parachute Arrangements

    Say on golden parachute provisions apply where:

    Seeking shareholder approval of an acquisition, merger, consolidation, or proposed sale or disposition of all or substantially all of a public companys assets

    Disclosure also required in connection with going-private transactions and third-party tender offers

    Requirements:

    Disclosure

    Non-binding shareholder advisory vote

  • Morgan, Lewis & Bockius LLP 20

    Shareholder Vote on Golden Parachute

    Arrangements

    Disclosure requirements:

    Disclosure must be in a clear and simple form in accordance with the regulations and must include the aggregate total of

    all such compensation that may (and the conditions upon

    which it may) be paid or become payable to or on behalf of

    [named executive officers].

    Disclosure of the golden parachute arrangements required for all agreements and understandings that the acquiring and

    target companies have with named executive officers of both

    companies.

    Rules require a narrative and a table for disclosing golden parachute compensation.

  • Morgan, Lewis & Bockius LLP 21

    Shareholder Vote on Golden Parachute

    Arrangements Sample Table

    Elements that are separately quantified and included in the total are any cash severance payments (e.g., base

    salary, bonus, and pro rata non-equity incentive plan compensation payments) (column (b)); the dollar value of

    accelerated stock awards, in-the-money option awards for which vesting would be accelerated, and payments

    in cancellation of stock and option awards (column (c)); pension and nonqualified deferred compensation

    benefit enhancements (column (d)); perquisites and other personal benefits and health and welfare benefits

    (column (e)); and tax reimbursements (e.g., Internal Revenue Code Section 280G tax gross-ups) (column (f)).

    The Other column of the table includes any additional elements of compensation not specifically includable in

    the other columns of the table (column (g)) and requires footnote identification of each separate form of

    compensation reported. The table requires separate footnote identification of amounts attributable to single-

    trigger arrangements and amounts attributable to double-trigger arrangements, so that shareholders can

    readily discern these amounts.

  • Morgan, Lewis & Bockius LLP

    Shareholder Vote on

    Golden Parachute Arrangements

    A separate shareholder advisory vote is not required on

    golden parachute compensation if disclosure of that

    compensation was included in the executive

    compensation disclosure subject to a prior advisory vote

    of the shareholders (say on pay)

    Rare that previous say on pay disclosure is sufficient for

    this purpose

    Companies are not required to use any specific

    language or form resolution for the say on golden

    parachute vote

    22

  • Morgan, Lewis & Bockius LLP

    Shareholder Vote on

    Golden Parachute Arrangements

    Say on golden parachute vote only needs to address

    arrangements between the soliciting target company and

    the named executive officers of the target and acquiring

    companies

    23

  • Morgan, Lewis & Bockius LLP

    Executive Compensation Tax Issues in

    Mergers and Acquisitions

    Closing the Deal

    24

  • Morgan, Lewis & Bockius LLP 25

    The Deal Structure and Players

    What type of transaction?

    Stock purchase/merger (buyer gets everything)

    Asset deal (buyer can pick and choose)

    Public company deal

    Private company deal

    Considerations will vary for sell-side vs. buy-side vs.

    management

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure

    What does the plan require?

    Single-trigger or double-trigger vesting

    Consider treatment of performance-vested awards

    What does the plan permit?

    Unilateral right to cancel and terminate

    Ability to cancel underwater options

    Consent requirements; timing issues if notice is required

    26

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure

    What are the deal terms regarding equity awards?

    What are the business risks?

    Lillis v. AT&T Corp.: officers and directors whose underwater options were canceled without consideration in

    a cash acquisition argued that the acquiring corporation

    should have provided cash consideration based on the

    Black-Scholes value of the canceled options

    27

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure

    Assumption of Grants

    Options remain in place, but the underlying shares and

    the exercise price are adjusted to reflect the transaction

    The buyers shares are used upon the exercise of the

    assumed options but do not count against the buyers

    plan reserve

    May require Form S-8 registration for shares issuable

    under assumed options

    28

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure Substitution

    The old option is cancelled and a new option is issued

    under the buyers plan

    The number of shares and exercise price in effect under

    the new option are based on the number of shares and

    exercise price in effect under the old option, and

    adjusted to reflect the transaction

    29

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure Substitution

    The buyers shares are used upon option exercises and

    may be charged against the buyers plan

    May require Form S-8 registration for shares issuable

    under substituted options

    30

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure Adjustment

    Assumption or substitution of incentive stock options

    must comply with Section 424 regulations

    Assumption or substitution of nonqualified stock options

    must comply with Section 409A regulations, which refer

    to certain regulations under Section 424

    31

  • Morgan, Lewis & Bockius LLP 32

    Equity Plan/Award Structure Adjustment

    IRC Section 424 Principles

    Aggregate Spread Test:

    The excess of the aggregate fair market value of the shares

    subject to the new or assumed option immediately after the

    transaction over the aggregate exercise price must not

    exceed the excess of the fair market value of the shares

    subject to the old option immediately before the transaction

    over the aggregate exercise price

  • Morgan, Lewis & Bockius LLP 33

    Equity Plan/Award Structure Adjustment

    Example: Old option for 100 shares with $10 per share

    exercise price. At time of acquisition, targets stock is

    worth $20 per share = $1,000 spread. If fair market value

    of acquirers stock is $40 per share at time of acquisition,

    adjusted option will be for 50 shares of acquirers stock

    with exercise price of $20 per share = $1,000 spread.

  • Morgan, Lewis & Bockius LLP 34

    Equity Plan/Award Structure Adjustment

    IRC Section 424 Principles

    Exercise price to fair market value ratio:

    On a share-by-share basis, the ratio of the exercise price to the fair market value of the shares subject to the new or assumed option immediately after the transaction is not more favorable than the ratio of the exercise price to the fair market value of the shares subject to the old option immediately before the transaction

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure Adjustment

    Example: Old option for 100 shares with $10 per share exercise price and $20 per share fair market value at time of transaction yields 1:2 ratio.

    If fair market value of acquirers stock at time of transaction is $40 per share, then option for 50 shares with $20 exercise price per share also satisfies ratio test: $20 to $40 yields 1:2 ratio

    35

  • Morgan, Lewis & Bockius LLP 36

    Equity Plan/Award Structure Adjustment

    IRC Section 424 Principles

    No new benefits:

    The new or assumed option must not give the optionee

    additional benefits

    Vesting acceleration is permissible

  • Morgan, Lewis & Bockius LLP 37

    Equity Plan/Award Structure Adjustment

    IRC Section 424/409A Principles

    Determination of fair market value:

    Any reasonable method of valuation may be used to

    determine the fair market value of the shares subject to the

    option immediately before the assumption or substitution and

    the fair market value of the shares immediately after the

    assumption or substitution

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure Adjustment

    Determination of fair market value:

    For an arms-length transaction, the fair market value of the

    stock subject to the option before and after the assumption or

    substitution may be based upon the values assigned to the

    stock for purposes of the transaction

    38

  • Morgan, Lewis & Bockius LLP

    Equity Plan/Award Structure Cash-Out

    Cash-Out of Options

    Seller stock option is cancelled for a payment made in cash or stock of the acquirer

    Amount of the cash-out is typically equal to the intrinsic value (spread) of the option at the closing of the

    transaction

    39

  • Morgan, Lewis & Bockius LLP 40

    Equity Plan/Award Structure Cash-Out

    Issues relating to cash-out of options

    Loss of ISO status

    Cash-out is taxed as ordinary income

    Cash-out of ISO = withholding taxes and employment taxes

    Disqualifying disposition of ISO shares = no withholding

    taxes and no employment taxes

    Underwater options: make sure the plan allows for the cash-out without having to pay consideration

  • Morgan, Lewis & Bockius LLP

    Potential Severance Obligations

    Stock Deal:

    Buyer assumes liability for existing arrangements

    Consider whether any severance or change in control plans

    prohibit amendment for a specified period following a change

    in control

    Determine potential liability under:

    Offer letters and employment agreements

    Severance plans and agreements

    Change in control plans and agreements

    41

  • Morgan, Lewis & Bockius LLP

    Potential Severance Obligations

    Asset Deal:

    Transferred employees will experience termination of employment, absent special provisions in plans and

    agreements

    Consider whether the transaction triggers severance pay

    42

  • Morgan, Lewis & Bockius LLP

    Additional Unfunded Liabilities

    Types of Liabilities:

    Supplemental executive retirement plans; excess plans

    Incentive plans (annual or long-term)

    Other nonqualified deferred compensation plans

    Payment Triggers

    Does the plan or agreement provide for payment (or funding) upon a change in control?

    Is the payment hardwired into the deal document?

    43

  • Morgan, Lewis & Bockius LLP

    Additional Unfunded Liabilities

    Which party will be obligated to pay:

    Nonqualified plans/SERPs

    Buyer assumes plans and all liabilities (or just those with

    respect to transferring employees)

    Buyer establishes mirror plans

    In an asset deal, transferring employees will have termination

    of employment triggering payment upon termination, unless

    terms provide otherwise

    44

  • Morgan, Lewis & Bockius LLP

    Additional Unfunded Liabilities

    Which party will be obligated to pay:

    Incentive plans

    Seller pays pro rata bonuses (employees may or may not

    then be eligible to participate in buyers incentive plans)

    Buyer pays bonuses for full year (may be problematic if

    bonuses are based on sellers performance)

    Retention concerns

    45

  • Morgan, Lewis & Bockius LLP

    Section 409A Compliance of Existing

    Arrangements

    Frequently encounter a lack of compliance especially

    private companies

    Requires careful and creative planning when considering

    potential acquisitions

    Must lay out business deal risks for acquirer (employee

    penalty tax, reporting and withholding obligations,

    potential gross-up)

    46

  • Morgan, Lewis & Bockius LLP

    Section 409A Compliance of Existing

    Arrangements

    Individuals in noncompliant plans are subject to tax at

    the time of vesting, plus (i) an additional 20% federal

    income tax and (ii) interest at the underpayment rate

    plus 1%

    California taxpayers are also subject to an additional 5% state income tax

    Employer has tax reporting and withholding obligations

    and may incur penalties if it does not properly report and

    withhold

    47

  • Morgan, Lewis & Bockius LLP

    Section 409A Compliance of Existing

    Arrangements

    Equity plans

    Fair market value documentation for stock right grants is key in private company transactions (especially if stock

    rights will be assumed)

    Stock rights are options and stock appreciation rights

    Stock rights must be granted on service recipient stock

    Common stock of the company that employs the grantee or a

    parent company

    RSUs must have Section 409A-compliant payment terms, or must meet an exemption from Section 409A

    48

  • Morgan, Lewis & Bockius LLP

    Section 409A Compliance of Existing

    Arrangements

    Change in control provisions

    Does the time or form of payment vary after a change in control?

    Is the change in control definition compliant with Section 409A?

    Can equity grants or other arrangements be terminated/cashed out under Section 409A?

    Substitution issues

    49

  • Morgan, Lewis & Bockius LLP

    Section 409A Compliance of Existing

    Arrangements

    Severance Plan/Employment Agreement

    Review payment provisions

    Look out for differing forms of payment (installments before

    change in control and lump sum after change in control)

    Good Reason trigger

    Look out for weak Good Reason definitions and walk rights

    Six-month delay for specified employees in public companies

    Release timing issues

    50

  • Morgan, Lewis & Bockius LLP 51

    Section 409A Extension of Vesting

    Extension of vesting of awards or other compensation

    that otherwise would vest on the change in control:

    Extended vesting condition must constitute a substantial risk of forfeiture

    Extension must occur before and in connection with the change in control

  • Morgan, Lewis & Bockius LLP 52

    Section 409A Amounts Payable on a

    Change in Control

    Amounts subject to Section 409A can only be paid on a change in control if the change in control meets the requirements of a 409A-compliant change in control

    Keys off of employer (or payor) corporation or any corporation up the chain, linked by majority ownership note distinction from Section 280G, which looks to the controlled group in determining whether a change in control has occurred

    Change in ownership acquisition of more than 50%

    Change in effective control acquisition of 30% or more or turnover of a majority of the board of directors within 12 months

    Change in ownership of a substantial portion of assets more than 40% within 12 months

    Note that spinoffs and IPOs typically do not satisfy the requirements for a change in control

  • Morgan, Lewis & Bockius LLP 53

    Section 409A Separation from Service

    Separation from Service:

    Generally requires substantial, permanent reduction in service level with direct employer and its controlled group

    In stock sale, there is continuity of employment with direct employer, and generally no separation from service (even

    though there may be a change in control)

    In asset sale transactions, default is that there would be a separation from service for transferring employees

    Parties may agree to not treat as separation from service, but

    must be consistent

  • Morgan, Lewis & Bockius LLP 54

    Section 409A Amounts Subject to Earn-Out

    Earn-out Consideration

    Earn-out consideration will be subject to Section 409A if not payable within the short-term deferral period

    Short-term deferral period is generally payment within 2-1/2 months after the year in which the compensation vests

  • Morgan, Lewis & Bockius LLP

    Section 409A Amounts Subject to Earn-Out

    Earn-out will satisfy Section 409A if:

    Earn-out must be paid on the same schedule and under the same terms and conditions as apply to the shareholder payments, and must be paid within 5 years after the change in control

    Earn-out constitutes a substantial risk of forfeiture and is payable upon the same terms and conditions as apply to the payments made to the shareholders

    in such event the legally binding right to the earn-out is treated for purposes of the short-term deferral exception as arising on the date it became subject to the substantial risk of forfeiture

    55

  • Morgan, Lewis & Bockius LLP

    Section 409A Plan Termination

    Change in control plan termination

    Regulations provide special opportunities to terminate Section 409A arrangements pursuant to a change in control

    Must terminate all plans of the same type for all participants experiencing a change in control

    Note plan aggregation categories

    Termination must occur within 30 days before or within 12 months following a change in control

    All payments must be made within 12 months following the date of the action to terminate

    56

  • Morgan, Lewis & Bockius LLP

    The Golden-Parachute Tax

    20% excise tax on the employee/independent contractor

    Loss of tax deduction to employer

    Imposed by IRC Sections 280G and 4999 on excess

    parachute payments

    57

  • Morgan, Lewis & Bockius LLP

    The Golden-Parachute Tax

    Parachute payments:

    Payments in the nature of compensation

    Made to certain disqualified individuals

    Company service provider who is an officer, 1% or more

    shareholder, or highly compensated employee (highest-

    paid 1%, not to exceed 250 employees)

    Contingent on a change in control (i.e., change in the ownership or control of a corporation or in the ownership of

    a substantial portion of its assets)

    58

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax

    Calculation of the Excise Tax

    If an executive receives parachute payments on a

    change in control that equal or exceed three times the

    executives base amount, then

    A 20% excise tax on all amounts in excess of one times the executives base amount, except to the extent those

    payments represent reasonable compensation

    Base amount is the executives average annual W-2 compensation for the most recent five calendar years

    (or period worked, if less) ending before the change in

    control

    59

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax

    Impact of the Excise Tax

    Executives care because they could owe a 20% excise

    tax

    Corporations care because parachute payments are not

    deductible, and corporations are required to report

    parachute payments on Form W-2 and withhold taxes

    correctly

    If a corporation fails to withhold and an executive does

    not pay, the government may try to collect the tax from

    the corporation

    60

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax Exemptions

    Payments made by a tax-exempt entity, partnership, or corporation that satisfy most of the requirements to be a small business corporation (commonly referred to as an S corporation)

    61

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax Exemptions

    Payments made by privately held companies when shareholder approval requirements are met

    Payments must be approved by more than 75% of the disinterested shareholders entitled to vote immediately before the change in control

    Adequate disclosure of all material facts regarding all material payments that otherwise would be parachute payments is provided to ALL persons entitled to vote

    Payments must be contingent on the vote

    62

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax

    Contingent on a Change in Control

    When is a payment contingent on a change in control?

    Payment would not have been made absent the change in control

    If it is substantially certain at the time of the change in control that a payment would be made regardless of

    whether a change in control occurs, it is not contingent on

    a change in control

    A payment made as a result of an event that occurs within one year of a change in control is presumed to be

    contingent on a change in control, but the presumption is

    rebuttable

    63

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax Transactions

    That Trigger Parachute Payments

    What is a change in control under Section 280G?

    Change in the ownership of a corporation

    Acquisition of more than 50% of the vote or value

    Change in the effective control of a corporation

    Presumption upon acquisition of more than 20% of the voting power

    or replacement of a majority of directors during a 12-month period,

    which presumption may be rebutted

    Transfer of a substantial portion of assets

    Assets with a value of at least one-third of the value of all assets,

    determined without regard to any liabilities

    Determined on a controlled group basis

    64

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax

    Parachute Payments

    What is a parachute payment?

    Payment in the nature of compensation, such as

    Transaction bonus

    Cash severance

    Continued health and welfare benefits

    Outplacement services

    Option and restricted stock vesting

    Accelerated payment of deferred compensation

    65

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax

    Excess Parachute Payments

    Special valuation rules under the 280G regulations can

    minimize the amount included as a parachute payment

    The portion of a parachute payment that exceeds the

    base amount allocated to it is referred to as an excess

    parachute payment

    The base amount is allocated pro rata among all the

    actual parachute payments

    66

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax Reasonable

    Compensation Before a Change in Control

    If the portion of a parachute payment that can be justified

    as reasonable compensation for services rendered

    before a change in control exceeds the base amount

    allocated to that parachute payment, the excess amount

    also will be subtracted from the excess parachute

    payment.

    67

  • Morgan, Lewis & Bockius LLP

    The Golden Parachute Tax Reasonable

    Compensation After a Change in Control

    If compensation is reasonable in amount for services to be rendered after the change in control, such amount is subtracted from the payments (i.e., essentially treated as an exempt payment) for all purposes of Section 280G

    Payments may only be made for the period the individual actually performs services

    If duties dont substantially change, compensation should not be significantly greater than it was prior to the change in control

    If duties substantially change, compensation should not be significantly greater than that paid in the market

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    The Golden Parachute Tax Reasonable

    Compensation After a Change in Control

    Restrictive covenants

    Compensation paid for a noncompete covenant may be considered reasonable compensation for services

    rendered after a change in control

    Enforceability of a noncompete covenant is required

    The IRS has opposed excessive values attributable to reasonable compensation, especially where noncompetes

    are adopted shortly before a change in control

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    The Golden Parachute Tax Strategies to

    Avoid Excise Taxes

    Gross-up provision for excise taxes

    Most companies no longer provide gross-ups

    Best-net provision for parachute payments

    Reduce payments to avoid excise tax if it puts an executive in a better net-tax position

    If paying excess parachute payments is better for the executive, the company loses the deduction

    Parachute cap

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    The Golden Parachute Tax Strategies to

    Avoid Excise Taxes

    Increase the executives base amount

    Attach a valid, enforceable noncompete to parachute

    payments (but note the audit risk previously discussed)

    Waiver and shareholder approval for private company

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    Presenters

    Mims Maynard Zabriskie

    [email protected]

    David Calder

    [email protected]

    Gina Lauriero

    [email protected]

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    mailto:[email protected]:[email protected]:[email protected]:[email protected]

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