162 m limitation and stock options

162 m limitation and stock options

By: ritrgjdfvf Date: 05.07.2017

Section (m) Final Regulations Clarify Requirements for Exemptions to $1 Million Deduction Limitation | Publications | Thought Leadership | McDermott Will and Emery

Please contact customerservices lexology. In the past few years there has been an uptick in stockholder derivative litigation related to equity compensation granted to named executive officers that exceed the plan share limits.

The claims against the companies include breach of fiduciary duty, waste of corporate assets, unjust enrichment and false or misleading disclosures. At the core of these claims is Section m of the Internal Revenue Code. A stock option by its nature is performance-based, as the optionee generally receives a benefit only if the value of the stock at the time of exercise exceeds the exercise price.

Section (m) Final Regulations Clarify Requirements for Exemptions to $1 Million Deduction Limitation | Publications | Thought Leadership | McDermott Will and Emery

For other types of awards, the stockholders must approve the maximum amount that can be paid to an individual either through a fixed amount or a formula that allows a stockholder to calculate the maximum amount. Typically, a plan will set forth a maximum number of shares or value of shares that may be granted as a performance-based full-value award, for example, restricted stock units or restricted stock upon which vesting is conditioned upon the achievement of performance goals.

It is best practices for a company to avoid compromising the qualification of equity compensation as "performance-based" by taking preventative measures.

162 m limitation and stock options

For example, a company may have its stockholder services department calculate the maximum amount of shares that may be granted, under a stock option or full-value award, to any individual in advance of a meeting of the board of directors or compensation committee in which equity awards are to be approved. A cancellation and re-grant of a stock option is not without challenges.

162 m limitation and stock options

The company may not wish to tackle the complexities of re-granting a stock option at the original exercise price, if the stock price has increased, as the re-grant would be considered a discounted stock option and subject to Section A of the Internal Revenue Code.

Nevertheless, unless the plan has a provision invalidating an excess grant, the cancellation of the stock option is an adverse action requiring the consent of the optionee. If the stock price has decreased, the company would be prudent to re-grant the stock option at the original exercise price as a re-grant at a lower price may be deemed a repricing, which would require stockholder approval under certain listing rules.

Know your limits! Section (m) and excess equity grants - Lexology

A company should be aware that a grant in excess of the plan limits will not always create a tax issue. Also, whether or not an award is deductible may not matter to a company that is currently operating at a loss. We recommend that companies conduct an internal audit of their equity plans in advance of receiving a demand letter from, or notice of a lawsuit filed by, a stockholder. If you are interested in submitting an article to Lexology, please contact Andrew Teague at ateague GlobeBMG.

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Follow Please login to follow content. Register now for your free, tailored, daily legal newsfeed service. USA July 31 Cancel Excess Shares Subject to the Award: Cancel the Award and Re-Grant Under a Separate Equity Plan: The new stock option award would have to be granted under a separate stockholder approved plan within the limits of such separate plan.

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162 m limitation and stock options
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