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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
A. Structuring the Deal
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.
A. Structuring the Deal
10
A. Structuring the Deal
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
A. Structuring the Deal: Treatment of Equity Awards
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?
A. Structuring the Deal: Treatment of Equity Awards
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
A. Structuring the Deal: Option Assumption
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
A. Structuring the Deal: Option Assumption
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?
A. Structuring the Deal: Escrows/Earnouts
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
A. Structuring the Deal: Escrows/Earnouts
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
B. Conducting Diligence
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
B. Conducting Diligence
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?
B. Conducting Diligence
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
B. Conducting Diligence
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
B. Conducting Diligence
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
B. Conducting Diligence
34
1. PRE-SIGNING
Types of Employee Arrangements (cont.):
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.
B. Conducting Diligence
35
1. PRE-SIGNING
Types of Employee Arrangements (cont.):
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
B. Conducting Diligence
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
B. Conducting Diligence: 280G
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
B. Conducting Diligence: 280G
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
B. Conducting Diligence: 280G
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)
B. Conducting Diligence: 280G
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
B. Conducting Diligence: 280G
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
C. Negotiating the Transaction Document
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
C. Negotiating the Transaction Document
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.
C. Negotiating the Transaction Document
46
D. Considering Retention/Employment Arrangements
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
D. Considering Retention/Employment Arrangements
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
D. Considering Retention/Employment Arrangements
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
D. Considering Retention/Employment Arrangements
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
D. Considering Retention/Employment Arrangements
51
2. POST-SIGNING/PRE-CLOSING
52
2. POST-SIGNING/PRE-CLOSING
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
2. POST-SIGNING/PRE-CLOSING
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
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4. POST-CLOSING
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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
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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.
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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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