Linda Sherman
Executive Compensation Issues
Linda Sherman, Senior Partner at Hale and Dorr LLP, introduced her discussion on executive compensation issues by observing that "there have been a variety of events in the last year of which executives should take note."
However, the good news, according to Sherman is that the moratorium on FICA and FUTA taxes, that have applied to disqualifying ISO exercises, has been extended. In 2001, the IRS announced that they understood that the issue of tax withholding, and the payment of FICA taxes on the exercise of ISOs and the disqualifying disposition was in flux and uncertain. Sherman noted that there were some cases that seemed to go both ways, so the IRS's moratorium stated that if an employee exercises an ISO and then disqualifies it, no FICA and FUTA taxes would be due and no income tax withholding would be required by the company. Although there was a two year program that was supposed to end January 1 of this year, the IRS extended it indefinitely while trying to determine what the rule should be.
However, Sherman said that the well-publicized new exchange rules that were issued this year by the NYSE and the NASDAQ require careful review in determining when shareholder approval is required by those who are establishing or modifying equity-based benefit plans. The thrust of these rules has been to increase the number of situations in which shareholder approval will be required. Sherman explained that the basic rule is that shareholder approval of employee equity plans or grants is required unless the plan or grant comes within a fairly limited list of exceptions on the NYSE side and a similar list of exceptions on the NASDAQ. Review with the exchanges may be appropriate in many cases.
Although the old broad-based plan exception is gone, some of the other exceptions still apply. For example, Sherman said that a qualified plan, such as a retirement plan under Section 401(a), is not required to have shareholder approval. Employee stock purchase plans, the so-called "423 plans," do not have to have shareholder approval. However, these plans do require shareholder approval for tax purposes in order to be considered 423 plans. But the company has some time after the plan is adopted to obtain the shareholder approval for tax purposes.
In certain cases non-U.S. clones of 423 plans may also be exempt from shareholder approval rule. The NASDAQ does not mention this exemption explicitly. Sherman also noted a few additional exceptions: post-transaction grants to employees of an acquired company may be exempt if the plan acquired by the company has received shareholder approval by the company prior to its acquisition. Also inducement grants can, under special circumstances, still be considered exempt from the shareholder approval rule.
Jonathan Rosenfeld
Hiring and Firing Measures to Avoid Liability
Jonathan Rosenfeld, Senior Partner at Hale and Dorr, prepared a presentation on "Hiring and Firing: Top Preventative Measures to Take to Avoid Liability." Although Mr. Rosenfeld was unfortunately unable to participate, his presentation is available on the FindLaw Corporate Counsel Center at https://corporate.findlaw.com/seminars/employment/index.html.