Executive Compensation Tax Issues in M&A: Navigating IRS Rules - - PowerPoint PPT Presentation

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Executive Compensation Tax Issues in M&A: Navigating IRS Rules for Stock Options, Deferred and Equity Comp, Golden Parachutes

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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
• n 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
• f 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

• f 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

• f 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
• f 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
• utstanding 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

• n 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
• f 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
• n 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

• f 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
• f 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

• f 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

• r 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

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• 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

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• 3. CLOSING

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• 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 | erica.schohn@skadden.com

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Gavin A. White

Skadden, Arps, Slate, Meagher & Flom LLP New York, NY 212.735.3418 | gavin.white@skadden.com

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

• f 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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