Putting Together an
Up-to-Date Executive
Compensation Agreement
Pamela Baker
Partner, Chicago
Dentons
+1 312 876 8989
pame...
Putting Together an Up-to-Date Executive
Compensation Agreement
Overview
May 20, 2014
• Stated term vs at-will employment
...
Term vs at-will employment
May 20, 2014 3
• Stated term
• Allow automatic renewal, unless notice of non-renewal.
• Prefer ...
Duties and reporting responsibilities
May 20, 2014 4
• The less specific the statement of duties, the more difficult
to co...
Severance triggers and other matters
May 20, 2014 5
• No severance is paid on "voluntary" termination (including retiremen...
May 20, 2014 6
Termination of employment – terminology matters
• Avoid using phrases such as “termination of status as a c...
May 20, 2014 7
Termination of employment – terminology matters
• Note: Keeping someone “on the payroll” does not serve to ...
May 20, 2014 8
What’s triggered by termination of employment?
• Employee benefits
─Trigger date for commencement of qualif...
May 20, 2014 9
What’s not triggered by termination of employment?
• Start of time period for executing a release and waive...
Severance benefits and other matters
May 20, 2014 10
• Severance benefits (pre-CIC):
• Salary multiple, with or without bo...
Planning for Sale of the Company - new severance
triggers and other matters
May 20, 2014 11
• Same severance on "involunta...
"Cause" definition (infinite variations)
May 20, 2014 12
Executive's
• commission of a felony or crime involving moral tur...
"Good Reason" definition (very little variation)
May 20, 2014 13
• Material diminution in Executive's base compensation
• ...
Release
May 20, 2014 14
• Specify requirement for release in the agreement ab initio. Don't just try
to sneak it in at the...
Restrictive Covenants
May 20, 2014 15
• Confidentiality agreement/provision has become standard
• Non-compete (where allow...
Golden parachute matters
May 20, 2014 16
• Parachute tax applies if amounts paid "contingent" on CIC exceed 3x last
5-year...
Ability to Amend
May 20, 2014 17
• Individual agreements normally require agreement of "party to be
bound."
• Plans or equ...
Flexibility to accelerate or defer payment under
162(m) - Sample language only. This may not work
or it may not work for y...
Need Updated Boilerplate? (409A)
May 20, 2014 19
• 409A
• Internal Revenue Code Section 409A. Notwithstanding any provisio...
Need Updated Boilerplate? (409A)
May 20, 2014 20
(c) Any amounts payable solely on account of an involuntary
separation fr...
Need Updated Boilerplate? (409A)
May 20, 2014 21
(con't)
be made no later than the last day of the calendar year following...
Need Updated Boilerplate? (409A)
May 20, 2014 22
(f) To the extent payment of deferred compensation is triggered by
termin...
Need Updated Boilerplate? (Other)
May 20, 2014 23
• No breach of prior contract by taking on new employment. No breach of
...
Employee responsible for taxes. Sample language. This
may not work, or it may not work for you. No guarantees.
May 20, 201...
May 20, 2014 25
APPENDIX
May 20, 2014 26
APPENDIX ISSUE #1
Differing CIC definitions under IRC Section 280G, IRC Section
409A, and the "traditional...
Change-in-Control Definitions
May 20, 2014 27
CIC Defs Traditional Agreement 280G 409A
Change in
control
50% stock acquisi...
CIC Definitions - Traditional plan, 280G, 409A
May 20, 2014 28
• There can be a CIC under one definition and not under eit...
CIC Definitions - Traditional plan, 280G, 409A
May 20, 2014 29
• Better compliance comfort with a single definition that m...
409A-CIC Sample language. This may not work, or it may
not work for you. No guarantees.
May 20, 2014 30
"… provided that i...
May 20, 2014 31
APPENDIX ISSUE #2
Since companies no longer offer golden parachute excise tax gross-ups, is
it better to c...
280G Issues - Building in Flexibility - Comparison -
Employees with Similar Current Compensation
May 20, 2014 32
Safety Sa...
Best after-tax provision. Sample language. This may not
work, or may not work for you. No guarantees.
May 20, 2014 33
"(a)...
Planning to maintain flexibility in the event of a
Change in Control (cont.) -- Private Company
May 20, 2014 34
• Since th...
280G cutback. Sample language. This may not work, or it
may not work for you. No guarantees.
May 20, 2014 35
"In the event...
Beware 409A issues with 280G cutbacks
May 20, 2014 36
The issue:
If deferred compensation is reduced in order for the empl...
280G Cutback with specific ordering. Sample
language. This may not work, or it may not work for
you. No guarantees.
May 20...
Required Circular 230 Disclosure
May 20, 2014 38
Any Federal tax advice contained herein is not to be used for, and the
re...
© 2014 Pamela Baker
Dentons is an international legal practice providing client services worldwide through its member firm...
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Putting Together an Up-to-Date Employment or Severance Agreement

  1. 1. Putting Together an Up-to-Date Executive Compensation Agreement Pamela Baker Partner, Chicago Dentons +1 312 876 8989 pamela.baker@dentons.com ©Pamela Baker 2014 All rights reserved CLE Seminar for In-House Counsel May 20, 2014 Kansas City, MO
  2. 2. Putting Together an Up-to-Date Executive Compensation Agreement Overview May 20, 2014 • Stated term vs at-will employment • Duties and reporting responsibilities, full time efforts • Severance triggers and payments • Planning for a sale of the company (or change in control) • "Cause" and "good reason" definitions • Releases and carve-outs • Restrictive covenants and claw backs • Employee responsibility for taxes • Consent to amendments • Updated boilerplate for 409A and other matters 2
  3. 3. Term vs at-will employment May 20, 2014 3 • Stated term • Allow automatic renewal, unless notice of non-renewal. • Prefer "rolling" employment period, which renews each day by one day rather than, e.g., 60-days notice of non- renewal. • Non-renewal allows company to exit without severance • Non-renewal may avoid change-in-control payments, depending on timing • At-will employment • Always desirable for the company • May limit damages if employee claims wrongful termination • Most important: not inconsistent with stated term
  4. 4. Duties and reporting responsibilities May 20, 2014 4 • The less specific the statement of duties, the more difficult to control "good reason" termination. • The less specific the reporting relationship, the more difficult to control "good reason" termination. • To avoid the need for continual amendments and to avoid an out-of-date agreement, add a catch-all: "and such other duties and responsibilities as are [lawfully] assigned by the [board/supervisor][appropriate to the role of [title]]". • Requirement of full-time efforts (or full-time business efforts). Consider carve-out for charitable boards. Limit on the number?
  5. 5. Severance triggers and other matters May 20, 2014 5 • No severance is paid on "voluntary" termination (including retirement), or on death or disability. • How to define "involuntary termination?" • Initiated by the company • Exclude termination for "cause" • "Good reason" termination often only available within 1 year following change in control
  6. 6. May 20, 2014 6 Termination of employment – terminology matters • Avoid using phrases such as “termination of status as a common law employee.” The person may incur a termination of employment and continue work as an independent contractor. • Contrast “separation from service” – generally, a cessation of performance of services, whether as an employee or independent contractor. It's a permitted trigger for payment of (nonqualified) deferred compensation. May or may not be a termination of employment. • Contrast “last day worked” which may be relevant for disability, and may trigger measurement of how much salary and unused vacation pay must be paid immediately on termination. • Contrast termination of the “employment agreement.” Termination of the contract does not necessarily terminate employment! • Contrast “break in service,” a measure of a gap in services that can lead to loss of qualified retirement plan benefits, regardless of whether the employment relationship has terminated.
  7. 7. May 20, 2014 7 Termination of employment – terminology matters • Note: Keeping someone “on the payroll” does not serve to postpone termination of employment or “separation from service.” • If you define “Termination Date,” be sure to indicate precisely when it occurs. “The date employment terminates under this employment agreement for any reason” is not a satisfactory definition. • Will employment continue under another agreement? Or as an employee-at-will without an agreement? • If employment may be terminated “on notice” is the Termination Date the date the notice is delivered, or some other date? • If termination is for “cause,” is there a procedure for determining cause? When is the Termination Date? After cure period?
  8. 8. May 20, 2014 8 What’s triggered by termination of employment? • Employee benefits ─Trigger date for commencement of qualified retirement plan payments, unless triggered by age alone ─End to eligibility for continued qualified retirement plan accruals ─End to eligibility for coverage under some welfare benefit plans (though a drop in hours worked below the applicable threshold can also trigger loss of eligibility). Need to check life insurance coverage, AD&D, health coverage (medical, dental, vision), travel accident coverage, etc. • Usually starts/ends timing for eligibility for “double trigger” change in control benefits • Trigger date to determine vesting of equity compensation (almost always) • May trigger the right to contractually promised severance benefits (though a “separation from service” may also be required in order for severance benefits to commence).
  9. 9. May 20, 2014 9 What’s not triggered by termination of employment? • Start of time period for executing a release and waiver of claims against the company. Triggered by when the release is presented. • Start of 6-month delay period for commencement of benefits triggered by “separation from service” • There may be a “termination of employment” but not a “separation from service” if the person continues to provide material consulting or transition services. • There may be a “separation from service” but not a “termination of employment” where there is a required notice period for termination but the executive is relieved of duties before the end of the notice period. • Payment date for any non-qualified deferred compensation triggered by “separation from service.”
  10. 10. Severance benefits and other matters May 20, 2014 10 • Severance benefits (pre-CIC): • Salary multiple, with or without bonus component. Usually not "remainder of the term." • If bonus component included, usually prorated based on actual performance, payable when others get their bonuses • Severance increasingly paid in installments, as salary continuation • COBRA subsidy after ACA? (Yes, still common; caution re locking in)
  11. 11. Planning for Sale of the Company - new severance triggers and other matters May 20, 2014 11 • Same severance on "involuntary" termination after CIC as before? • Many companies provide additional severance on involuntary termination after CIC, perhaps under a separate plan. Beware 409A. • No more 3x • 2x more common, even for CEO; lower multiples for direct reports. • Many companies pay post-CIC severance in a lump sum and pre-CIC severance in installments. Beware 409A. • Post-CIC severance is "always" double trigger. Protected period is usually 1 year, starting on (not before) the CIC. Metaphysical and 409A concerns. • Other post-CIC severance benefits may include • Payout of annual bonus at target (often pro rated) on termination. • Accelerated vesting of equity • Increasingly common to have accelerated vesting be double trigger • Usually contained in equity grant agreement or equity plan
  12. 12. "Cause" definition (infinite variations) May 20, 2014 12 Executive's • commission of a felony or crime involving moral turpitude • act or omission in connection with his duties that could result in material injury to the business or reputation of the Company • willful failure to perform his duties under this Agreement (30-day cure right) • material misconduct or breach of any written policy of the Company (30- day cure right) • breach of any material provision of this Agreement (30-day cure right) provided, Cause shall not include acts or omissions taken in good faith on behalf of the Company so long as such acts or omissions were within the scope of Executive's authority, did not constitute a breach of any fiduciary duty, and were not taken (or omitted) after written direction from the Board to cease such actions or omissions.
  13. 13. "Good Reason" definition (very little variation) May 20, 2014 13 • Material diminution in Executive's base compensation • Material diminution in executive's authority, duties, or responsibilities • Material change in the geographic location where Executive is required to perform services (or "required move" of 35/50 miles) • Material breach of this Agreement by the Company. Rarely: • Material diminution in the authority, duties, or responsibilities of the person to whom the Executive reports (or a requirement to report to an officer instead of the board) • Material diminution in the Executive's budget. Always: requirement of notice within 90 days of onset of "good reason" with at least 30 days for Company to cure. Termination required within at most 2 years of onset (usually much quicker).
  14. 14. Release May 20, 2014 14 • Specify requirement for release in the agreement ab initio. Don't just try to sneak it in at the end. • May need specific consideration; not mere employment • "… provided that, if the Executive provides the Release contemplated herein, in no event shall the Executive be entitled to benefits of less than $5,000 (or the amount of the benefits described in Sections x and y, if less than $5,000), which amount the parties agree is good and adequate consideration, in and of itself, for the Executive’s Release." • See also, Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327 (without additional consideration, mere employment for less than two years insufficient consideration for restrictive covenants). • Release carve-outs • Severance, SERP, named qualified plan payments to be made post-release • COBRA subsidy • D&O coverage (if applicable) • Statutory amounts (e.g., vacation pay)
  15. 15. Restrictive Covenants May 20, 2014 15 • Confidentiality agreement/provision has become standard • Non-compete (where allowed) generally no more than 1 year (occasionally 18 months or 2 years) • Non-solicit of customers and employees more common than non- compete. Same time frame as non-compete. • Restricted period usually matches severance payout period • Restrictive covenants subject to: • Cessation of future severance payments if violation • Claw back of previously paid amounts if violation (driven by Dodd-Frank expansion of claw back rules for public companies) • "Suspension" of restricted period during period of violation (e.g., if compete for 3 months, the non-compete period is extended for 3 months).
  16. 16. Golden parachute matters May 20, 2014 16 • Parachute tax applies if amounts paid "contingent" on CIC exceed 3x last 5-year average W-2 pay. Parachute tax is 20% of "contingent" pay in excess of 1x last 5-year average. • For privately-held companies, if 75% of the shares, in a separate vote, approve the compensation, and if the vote determines the right to receive the compensation, there is no 20% tax. • Gross-ups are a thing of the past. • Gross-ups removed from existing agreements in favor of "cut back" or "better of" provisions. In private companies, employee consents in advance to forego right to compensation unless shareholders approve it. • See appendix for examples of sample language.
  17. 17. Ability to Amend May 20, 2014 17 • Individual agreements normally require agreement of "party to be bound." • Plans or equity agreements may permit the Company to amend, but participant consent is often required for any amendment that "adversely affects" the participant. • Drafting tip: add proviso that any amendment that "changes the timing of taxation" of the participant shall not be deemed to "adversely affect" the participant. • Failure to withhold FICA • 162(m) deferrals • 409A corrections • CIC acceleration • See sample language next page.
  18. 18. Flexibility to accelerate or defer payment under 162(m) - Sample language only. This may not work or it may not work for you. No guarantees. May 20, 2014 18 • "Without the consent of an affected Participant, no such Board action (terminating, amending or modifying the Plan) may materially and adversely affect the rights of such Participant under any outstanding Award. For this purpose, actions that alter the timing of federal income taxation of an award will not be deemed material unless the Committee determines that such action would result in an income tax penalty on the Participant."
  19. 19. Need Updated Boilerplate? (409A) May 20, 2014 19 • 409A • Internal Revenue Code Section 409A. Notwithstanding any provision of this Agreement, (a) This Agreement shall be construed and interpreted insofar as possible for all payments to be exempt from Section 409A and if any amounts are not so exempt, the Agreement shall be construed and interpreted so as to avoid the imposition of additional tax and/or interest under Section 409A insofar as possible. (b) Each payment of compensation under the Agreement shall be treated as a separate payment of compensation for purposes of applying the Section 409A deferral election rules and the exclusion from Section 409A for certain short-term deferral amounts.
  20. 20. Need Updated Boilerplate? (409A) May 20, 2014 20 (c) Any amounts payable solely on account of an involuntary separation from service within the meaning of Section 409A shall be excludible from the requirements of Section 409A, either as involuntary separation pay or as short-term deferral amounts (e.g., amounts payable under the schedule prior to March 15 of the calendar year following the calendar year of involuntary separation) to the maximum possible extent. (d) Any reimbursements or in-kind benefits provided under the Agreement shall be made or provided in accordance with the requirements of Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the period of time specified in the Agreement, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year, (iii) the reimbursement of an eligible expense will
  21. 21. Need Updated Boilerplate? (409A) May 20, 2014 21 (con't) be made no later than the last day of the calendar year following the year in which the expense is incurred, and (iv) the right to reimbursement or in- kind benefits is not subject to liquidation or exchange for another benefit. (e) If payment of any amount of “deferred compensation” (as defined under Section 409A, after giving effect to the exemptions thereunder) is contingent upon the Employee’s taking any employment related action, including but not limited to, agreeing to restrictive covenants or execution of a release and waiver of claims, and if the period within which Employee must take the employment related action would begin in one calendar year and expire in the following calendar year, then any payments contingent on such employment-related action shall be made in such following calendar year (regardless of the year of execution of such release) if payment in such following calendar year is required in order to avoid taxes, interest and penalties under Section 409A.
  22. 22. Need Updated Boilerplate? (409A) May 20, 2014 22 (f) To the extent payment of deferred compensation is triggered by termination of employment, “termination of employment “ shall mean “separation from service” within the meaning of Section 409A. (g) If executive is a “specified” employee as the date of termination of employment, any amount required to be delayed in compliance with Code Section 409A(a)(2)(B), shall not be paid or provided prior to the earlier of the expiration of the 6-month period measured from separation from service, or the date of death. Amounts subject to delay shall be paid in one lump sum, without interest, within ten days after the date they then become so payable.
  23. 23. Need Updated Boilerplate? (Other) May 20, 2014 23 • No breach of prior contract by taking on new employment. No breach of protective covenants of prior employer. • Clawback: "You are subject to any company policy as in effect from time to time regarding recoupment or clawback of compensation." • Successor. "Employer shall cause successor to assume this Agreement." (Affects "good reason.") • Employee responsible for all taxes. See Davidson v. Henkel Corporation, (12-cv-14103 E.D. Mich. July 23, 2013). (Sample language next page.)
  24. 24. Employee responsible for taxes. Sample language. This may not work, or it may not work for you. No guarantees. May 20, 2014 24 The employee shall be liable for any and all taxes, including income tax, social insurance, payroll tax, penalty or excise taxes or other tax-related items related to the Employee's compensation that are legally applicable or otherwise recoverable from the Employee (such as fringe benefit tax) by the Company ("Tax Items"). … Regardless of any action the Company takes with respect to any or all Tax Items, the Employee acknowledges and agrees that the ultimate liability for all Tax Items is and remains the Employee's responsibility and may exceed the amount actually withheld by the Company. The Employee further acknowledges that the Company (i) makes no representations nor undertakings regarding the treatment of any Tax Items in connection with any aspect of Employee's compensation, and (ii) does not commit to and is under no obligation to structure the terms or any aspect of compensation, including deferred compensation or equity compensation, to reduce or eliminate the Employee's liability for Tax Items or to achieve any particular tax result.
  25. 25. May 20, 2014 25 APPENDIX
  26. 26. May 20, 2014 26 APPENDIX ISSUE #1 Differing CIC definitions under IRC Section 280G, IRC Section 409A, and the "traditional" (pre-2005) CIC agreement
  27. 27. Change-in-Control Definitions May 20, 2014 27 CIC Defs Traditional Agreement 280G 409A Change in control 50% stock acquisition (exceptions for reincorporation, ESOPs, insertion of holding co.) 50% stock acquisition (exceptions permitted) 50% stock acquisition (higher threshold and exceptions permitted) Change in effective control (stock) 20% stock acquisition (except existing major shareholders, and exceptions as above) 20% stock acquisition in 12 months raises rebuttable presumption of CIC (not automatic) 30% stock acquisition in 12 months. Irrebuttable, but higher threshold, exceptions permitted. Change in effective control (board) Majority of incumbent board replaced hostilely at any time after effective date of plan Majority of incumbent board replaced hostilely within a 12-month period Majority of incumbent board replaced hostilely within a 12-month period Asset disposition Sale of all or substantially all the assets Acquisition by 1 person or group of more than 1/3 of gross assets in 12-month period, with exceptions Acquisition by 1 person or group of 40% or more of gross assets in 12-month period, with exceptions Other (Shareholder approval or) consummation of (a) a liquidation or dissolution, or (b) a merger unless the company is the survivor No analog No analog
  28. 28. CIC Definitions - Traditional plan, 280G, 409A May 20, 2014 28 • There can be a CIC under one definition and not under either of the other two. • If still working with a "traditional" plan definition, need to be very careful about 280G (which may not be triggered, despite the plan's definition being triggered and entitling participants to benefits) and about 409A (which will not permit a change in payment time or form unless the CIC qualifies as such under 409A). • Most options, restricted stock and RSUs are exempt from 409A, either as "stock rights" or as short-term deferrals, and most CIC severance is double-trigger, so traditional CIC definition may not be bad. • But BEWARE of provisions causing loss of short-term deferral status, such as • "continued vesting" of RSUs on "retirement" • remaining "on the payroll" without duties some period of time, or garden leave, or terminal leave • cashout at "target" on involuntary termination of performance-based awards on CIC.
  29. 29. CIC Definitions - Traditional plan, 280G, 409A May 20, 2014 29 • Better compliance comfort with a single definition that meets 409A. • But be sure to draft parallel exclusions from the "traditional" plan, e.g., • For 50% stock acquisitions, exclude acquisition by subsidiaries or employee benefit plans, reincorporation in another state, and other mechanical changes that do not trigger a "real" CIC. • For 30% stock acquisition, consider drafting exclusion if incumbent board and/or incumbent CEO remains in place, or set a higher threshold than 30%. • Can only change the CIC definition with respect to future awards/accruals and/or with respect to awards/accruals that do not vest until at least the calendar year after the year of the amendment. Otherwise bad 409A acceleration or deferral. • Alternatively, can insert a requirement that, with respect to compensation subject to Section 409A, the CIC provisions will only apply if the CIC is 409A-compliant. See next slide for sample.
  30. 30. 409A-CIC Sample language. This may not work, or it may not work for you. No guarantees. May 20, 2014 30 "… provided that in the event the Company elects to accelerate delivery of any compensation subject to Section 409A or pay cash in exchange for the cancellation of any equity awards subject to Section 409A as the result of a Change in Control [as defined herein], such acceleration or exchange shall only be effective to the extent the event constitutes a change in control or change in effective control or a disposition of substantial assets under Section 409A. In all other circumstances, delivery will be made in accordance with the normal provisions applicable to the form of compensation or award." OR "In the event there is a 409A Change in Control [as defined herein], then the compensation subject to 409A shall become immediately payable. The occurrence of a CIC [old definition] that is not a 409A Change in Control shall have no effect per se on any compensation subject to 409A."
  31. 31. May 20, 2014 31 APPENDIX ISSUE #2 Since companies no longer offer golden parachute excise tax gross-ups, is it better to cut back the benefit to 3x minus $1 to avoid the excise tax, or to pay the full amount and let the employee pay the excise tax? How can you get employees to agree to "go naked" (forego the right to CIC severance benefits) in order to allow the shareholders of a private company to "determine" the amount of the parachute payment?
  32. 32. 280G Issues - Building in Flexibility - Comparison - Employees with Similar Current Compensation May 20, 2014 32 Safety Sam - net after tax Company deduction Better-off Betty - net after tax Company deduction 280G Cap $648,000 $1,079,999 $359,999 $599,999 No cap $552,000 $360,000 $599,999 $200,000 Assumptions: Sam and Betty each earn $400,000. Sam: 5-year avg. compensation $360,000 Parachute payment $1,200,000 Betty: 5-year avg. compensation $200,000 Parachute payment $1,400,000
  33. 33. Best after-tax provision. Sample language. This may not work, or may not work for you. No guarantees. May 20, 2014 33 "(a) If it is determined that any benefit received or deemed received by the Executive pursuant to this Agreement or otherwise (collectively, the “Potential Parachute Payments”) is or will become subject to any excise tax under Section 4999 of the Code ("Excise Tax") then, unless subsection (b) below applies, the Potential Parachute Payments shall be reduced to the largest amount that would not cause any Excise Taxes to be payable by Executive ("280G Cap Amount"). (b) Notwithstanding subsection (a), no such reduction shall be made if the After-Tax Amount (defined below) of the Potential Parachute Payments that would be payable to Executive exceeds 105% of the After-Tax Amount of the 280G Cap Amount. (c) Definitions. For purposes of this Section 7.1: “After Tax Amount” means the portion of a specified amount that would remain with Executive after payment of all Taxes paid or payable by Executive in respect of such specified amount; “Taxes” means all federal, state, local or other income taxes, Excise Taxes (if applicable), or other taxes. (d) Any reduction in Potential Parachute Payments required by subsection (a) shall be applied to the Potential Parachute Payments under this Agreement in inverse chronological order beginning with the payments or benefits that are latest in time."
  34. 34. Planning to maintain flexibility in the event of a Change in Control (cont.) -- Private Company May 20, 2014 34 • Since the shareholder vote must "determine" the right of the individual to receive the payment (it can't be just an "approval" of a payment that would be made anyway), it is sometimes necessary for an employee to be persuaded to "give up" the right to parachute compensation in order to allow the shareholder vote to occur. • This is obviously a risk that some individuals do not wish to take. • Solution: At hire, impose an automatic cutback (280G cap) unless shareholders approve all payments in excess of the cap. • See sample language next page.
  35. 35. 280G cutback. Sample language. This may not work, or it may not work for you. No guarantees. May 20, 2014 35 "In the event that it is determined that any payment or benefit provided to the Executive by the Company would, absent the application of this paragraph, be considered a "parachute payment" as defined in Code Section 280G(b)(2), subject to loss of deduction under Code Section 280G or the excise tax imposed under Section 4999, the Company will automatically reduce such parachute payments and/or benefits to the extent necessary to prevent any portion of the remaining payments and/or benefits from being subject to such loss of deduction or excise tax (a "280G cap") unless the shareholders of the Company vote to reinstate any parachute payments in excess of the 280G cap pursuant to a shareholder vote that satisfies the conditions of Code Section 280G(b)(5). The Company shall use its best efforts to submit for shareholder vote a recommendation to reinstate the Excess Parachute Payments."
  36. 36. Beware 409A issues with 280G cutbacks May 20, 2014 36 The issue: If deferred compensation is reduced in order for the employee to receive current payments, it would be treated as an impermissible acceleration of the deferred compensation payment under the Section 409A anti- substitution rules. If one amount of deferred compensation is foregone (or reduced) in order to receive another amount of deferred compensation at an earlier or later time, many believe it amounts to an improper deferral election or an improper acceleration, in violation of Section 409A.
  37. 37. 280G Cutback with specific ordering. Sample language. This may not work, or it may not work for you. No guarantees. May 20, 2014 37 "[There shall be a 280G cut back.] To the extent permitted under Section 409A of the Code, such reduction shall first be applied to any severance payments payable to the Executive in reverse order of receipt, then to the vesting on any equity, with underwater stock options first, and thereafter any in-the-money stock options, starting from the stock options with the smallest spread between fair market value and exercise price, and thereafter any restricted stock or RSUs." Continued health coverage?
  38. 38. Required Circular 230 Disclosure May 20, 2014 38 Any Federal tax advice contained herein is not to be used for, and the recipient cannot use such advice for, the purpose of avoiding any penalties asserted under the Internal Revenue Code. If the foregoing contains Federal tax advice, and if the foregoing is distributed to a person other than the addressee, each additional and subsequent reader hereof is notified that such advice was written to support the promotion or marketing of the transaction or matter addressed herein. In that event, each such reader should seek advice from an independent tax advisor with respect to the transaction or matter addressed herein based on such reader’s particular circumstances.
  39. 39. © 2014 Pamela Baker Dentons is an international legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices. Thank you! Pamela Baker Dentons US LLP 233 S. Wacker Dr. Chicago, IL 60606 USA

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