Copy of Schumer's "Shareholder Bill of Rights Act of 2009"
You can read a copy of Senator Schumer's proposed Shareholder Bill of Rights Act of 2009 here.
Wall Street Journal commentary.
See also coverage at the Harvard Corporate Governance Blog.
Senator Schumer's Corporate Governance Bill
We are looking forward to reading Senator Schumer's new corporate governance bill. We don't have a copy of the bill yet, but we do have a copy of a letter that the Senator sent to his colleagues. Apparently the bill will require shareholder approval of golden parachute payments. We will post you once we see a copy of the bill.
Is An Independent, Third Party Valuation Required By Section 409A To Grant Stock Options?
I was recently asked if a company had to obtain an independent, third party appraisal in order to grant stock options in compliance with Internal Revenue Code Section 409A, which generally requires that stock options be granted at fair market value or be subject to a 20% excise tax. The answer is no, a third party appraisal is not required.
"The final regulations adopt the provisions in the proposed regulations relating to the valuation of stock not readily tradable on an established securities market, subject to the modifications discussed in this section III.C.4.c. Accordingly, a valuation of stock based upon a reasonable application of a reasonable valuation method is treated as reflecting the fair market value of the stock. To meet this standard, it is not necessary that a taxpayer demonstrate that the value was determined by an independent appraiser. Where the taxpayer can otherwise demonstrate that the valuation was determined by the reasonable application of a reasonable valuation method, the standard will be met."
See the Final Regulations. That is not to say that an independent appraisal may not be advisable or worthwhile. In fact, if done in the manner specified in the final regulations, a valuation will create a presumption that the valuation of the stock reflects the fair market value of the stock, which presumption is only rebuttable by a showing that the valuation is grossly unreasonably.
"The final regulations adopt a presumption in specified circumstances that, for purposes of section 409A, a valuation of stock reflects the fair market value of the stock, rebuttable only by a showing that the valuation is grossly unreasonable. The presumption applies where the valuation is based upon an independent appraisal, a generally applicable repurchase formula (applicable for both compensatory and noncompensatory purposes) that would be treated as fair market value under section 83, or, in the case of illiquid stock of a start-up corporation, a valuation by a qualified individual or individuals applied at a time that the corporation did not otherwise anticipate a change in control event or public offering of the stock."
The Tax Problem With Using Nonrecourse Loans To Buy Restricted Stock
Executives frequently desire to start their capital gains holdings period with respect to their equity compensation awards immediately upon receipt of the awards. This generally cannot be accomplished if the executive receives stock options (the exception being the receipt of an immediately exercisable stock option, which is exercised and a Section 83(b) election is filed if the shares are subject to vesting).
The goal of starting the capital gains holding period upon receipt of an equity compensation award can be accomplished with a restricted stock award provided the stock is fully paid for and vested upon receipt or a Section 83(b) election is filed. However, if a loan is used to pay for the stock, and the loan is non-recourse, the goal of starting the capital gains holding period may very well be thwarted because the IRS will likely deem the transaction to be the grant of an option--not the receipt of stock--until the note is paid down (and treat the pay down of the note as the exercise of the option, with the tax consequences that accompany that).
Treasury Regulation Section 1.83-3(a)(2) provides as follows:
“In addition, if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option. The determination of the substance of the transaction shall be based upon all the facts and circumstances. The factors to be taken into account include the type of property involved, the extent to which the risk that the property will decline in value has been transferred, and the likelihood that the purchase price will, in fact, be paid. See also Sec. 1.83-4(c) for the treatment of forgiveness of indebtedness that has constituted an amount paid.”
Interesting Proposed Legislation From Senator Obama
Summary of Independent Contractor Proper Classification Act of 2007 (Introduced in Senate).
"Independent Contractor Proper Classification Act of 2007 - Amends the Revenue Act of 1978 to: (1) require employers to treat workers misclassified as independent contractors as employees for employment tax purposes upon a determination of misclassification by the Secretary of the Treasury; (2) repeal the ban on Treasury regulations or revenue rulings on employee/independent contractor classifications; and (3) eliminate the defense of industry practice as a justification for misclassifying workers as independent contractors.
Requires the Secretary to establish a procedure for workers to petition for a determination of their status as employees or independent contractors. Prohibits employers from retaliating against workers filing a petition. Requires the Secretary to take certain actions upon determining that an employee has been misclassified as an independent contractor, including informing the Department of Labor of such misclassification.
Requires the Secretaries of the Treasury and Labor to issue annual reports and exchange information on worker misclassification cases. Directs the Secretary of Labor to: (1) identify and track complaints involving worker misclassification for purposes of enforcing wage and hour laws; and (2) investigate industries identified by the Internal Revenue Service (IRS) as misclassifying workers.
Directs the Secretary of Labor to include on workplace posters required by the Fair Labor Standards Act a notice informing workers of their right to seek a status determination (i.e., whether they are employees or independent contractors) from the IRS.
Requires employers to: (1) notify their independent contractors of their federal tax obligations, the labor and employment protections inapplicable to independent contractors, and their right to seek a status determination from the IRS; and (2) maintain for three years a list of their independent contractors, including names and tax identification numbers."
Specter Responds to DOJ's Revisions of Attorney-Client Privilege Guidelines
"Senator Arlen Specter (R-Pa.), Ranking Member of the Senate Judiciary Committee, made the following statement in response to the Department of Justice’s revised attorney-client privilege guidelines:
“The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.” "
See here.
Coverage of this issue can also be found at thecorporatecounsel.net blog.
Delaware Chancery Decision on Self-Interested Director Compensation
In Julian v. Eastern States Construction Service, Inc. (Del. Ch. July 8, 2008), the Delaware Chancery Court ordered the disgorgement of director compensation bonuses after its determination that the bonuses did not pass the entire fairness standard.
"Self-interested directorial compensation decisions made without independent protections, like other interested transactions, are subject to entire fairness review. Directors of a Delaware corporation who stand on both sides of a transaction have “the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts.” They “are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain.” The two components of entire fairness are fair dealing and fair price. Fair dealing “embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” Fair price “assures the transaction was substantively fair by examining ‘the economic and financial considerations.’”"
SEC Approves Nasdaq Rule Change on Definition of Independent Director
The SEC has accepted the Nasdaq's proposed rule change increasing the dollar threshold for determining director independence. "Nasdaq Rule 4200(a)(15)(B) provides that a director of a listed company who accepted, or has a family member who accepted, any compensation from the company in excess of $100,000 during any period of twelve months within the preceding three years cannot be deemed an independent director (with certain exceptions). The proposed rule change would change this threshold amount to $120,000."
Grasso Prevails; Can Keep His Pay
SEC Issues Staff Observations in the Review of Executive Compensation Disclosure
The SEC issued its "Staff Observations in the Review of Executive Compensation Disclosure" today. This guidance grows out of the SEC's review of the executive compensation disclosures of 350 public companies, and gives a summary of the types of comments the SEC gave on various companies' compensation disclosures, and why it gave those comments. John W. White, the Director of the SEC's Division of Corporation Finance, also gave a speech today in which he discussed CD&A disclosures. You can view a text of the speech here.
Highlights of the staff observations on CD&A include, among other things:
- Focus on the how and why of decisions that were made;
- Emphasize material items, and de-emphasize immaterial items;
- Spend less time explaining mechanical procedures and lengthy statements on philosophy and more on how key decisions were made; flip the order--explain how the analysis resulted in the decisions made;
- Presentation matters--consider the order in which items are presented and how they are presented; and
- Consider adding tables that aren't required if they elucidate material issues.
The SEC guidance is helpful and worth reading.
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