table of contents - cch, a wolters kluwer business · xiv table of contents paragraph company and...

Table of Contents

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Chapter 1: Executive Employment Agreements

Overview—Executive Employment Agreements . . . . . . . . . 101Common Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.01The Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.02

Title(s) and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Base Salary and Bonus(es) . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Equity Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.01Restricted Stock and Performance Shares . . . . . . . . . . . . 135.02Other Equity-Based Compensation . . . . . . . . . . . . . . . . 135.03

Bonuses and Other Incentive Compensation . . . . . . . . . . . . 145Signing Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145.01Target Bonus and Bonus Plan Structure . . . . . . . . . . . . . 145.02Long-Term Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . 145.03

Employee Retirement and Insurance Benefits . . . . . . . . . . . . 155Nonqualified Plan Provisions in Employment

Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155.01Funding Nonqualified Plan Promises . . . . . . . . . . . . . . . 155.02Insurance and Welfare Benefits . . . . . . . . . . . . . . . . . . . . 155.03Supplemental Life or AD&D Insurance . . . . . . . . . . . . . 155.04Executive Physicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155.05Long-Term Care Insurance . . . . . . . . . . . . . . . . . . . . . . . 155.06

Severance and Change in Control Provisions . . . . . . . . . . . . 160Release of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160.01Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160.02

Noncompetes and Other Restrictive Covenants . . . . . . . . . . 165Nondisclosure and Nondisparagement . . . . . . . . . . . . . 165.01Noncompete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165.02Nonsolicit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165.03Remedies and Enforceability . . . . . . . . . . . . . . . . . . . . . 165.04

Perquisites and Other Compensation . . . . . . . . . . . . . . . . . . 175Special Tax-Favored Benefits and Perquisites . . . . . . . . . 175.01

Copyright ©2004, CCH INCORPORATED. All rights reserved.

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Stock or Home Purchase Loans . . . . . . . . . . . . . . . . . . . 175.02Below-Market Loan Issue . . . . . . . . . . . . . . . . . . . . . . . . 175.03Executive Relocation Expenses . . . . . . . . . . . . . . . . . . . . 175.04Other Benefits and Perquisites . . . . . . . . . . . . . . . . . . . . 175.05

Other Employment Agreement Provisions . . . . . . . . . . . . . . 185Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . 185.01Term of Employment Agreement . . . . . . . . . . . . . . . . . . 185.02Boilerplate Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 185.03

Offer Letters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195Offer Letters as Contracts . . . . . . . . . . . . . . . . . . . . . . . . 195.01

Chapter 2: Change in Control Agreements

Overview—Change in Control Agreements . . . . . . . . . . . . . 201Code Sec. 280G and Code Sec. 4999 . . . . . . . . . . . . . . . . 201.01Disqualified Individuals . . . . . . . . . . . . . . . . . . . . . . . . . 201.02Compensation Paid as a Result of a Change in Control . 201.03Payment in Excess of Three Times the Disqualified

Individual’s Base Amount . . . . . . . . . . . . . . . . . . . . 201.04Application to Corporations and Small-Business

Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201.05Litigation over Change in Control Agreements . . . . . . . 201.06Determining Whether a Change in Control Occurred for

Purposes of Code Sec. 280G . . . . . . . . . . . . . . . . . . . 201.07Caps, Gross-Ups and Other Parachute Agreement

Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201.08Final Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201.09

Does a Payment Constitute a Parachute Payment? . . . . . . . . 215Determining Who Is a Disqualified Individual . . . . . . . 215.01Three Times Base Amount . . . . . . . . . . . . . . . . . . . . . . . 215.02Compensation Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215.03

Payments Not Considered Parachute Payments . . . . . . . . . . 225Reasonable Compensation for Services Rendered Before

or After a Change in Control . . . . . . . . . . . . . . . . . . 225.01Covenants Not to Compete . . . . . . . . . . . . . . . . . . . . . . . 225.02Compensation Paid as Damages for a Breach of

Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225.03Securities Violation Parachute Payments . . . . . . . . . . . . 225.04Agreements Entered into After a Change in Control . . . 225.05

The Small Business Exemption . . . . . . . . . . . . . . . . . . . . . . . 235The Holding Company Exception . . . . . . . . . . . . . . . . . 235.01Voting Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235.02


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Adequate Disclosure Requirement . . . . . . . . . . . . . . . . . 235.03Tax-Exempt Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235.04

Contingent on Change in Control . . . . . . . . . . . . . . . . . . . . . 245Vested Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245.01Unvested Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245.02

Determining Whether a Change in Control Occurred forPurposes of 280G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255

Calculating the Amount of Excess Parachute Payments . . . . 265Caps, Gross-Ups and Other Parachute Agreement Terms . . 275The Prevalence of Parachute Agreements and Litigation . . . 285

Prevalence of Change in Control Agreements . . . . . . . . 285.01Perceptions of the Public and Acquirors . . . . . . . . . . . . . 285.02Litigation over Change in Control Agreements . . . . . . . 285.03

Chapter 3: Consulting Agreements

Overview—Consulting Agreements . . . . . . . . . . . . . . . . . . . 301Correctly Categorizing Individuals as an Employee or a

Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301.01Common Contract Provisions . . . . . . . . . . . . . . . . . . . . . 301.02Company and Consultant Tax Issues . . . . . . . . . . . . . . . 301.03

Correctly Categorizing Individuals as an Employee or aConsultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315Federal Insurance Contributions Required of

Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315.01Government Challenges to Companies’ Characterization

of Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315.02Legal Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315.03What the Future Holds . . . . . . . . . . . . . . . . . . . . . . . . . . 315.04

Consulting Agreement Provisions . . . . . . . . . . . . . . . . . . . . . 325Consultant’s Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325.01Consulting Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325.02Time Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325.03Status as an Independent Contractor . . . . . . . . . . . . . . . 325.04Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325.05Retirement and Welfare Benefit Plan Participation . . . . . 325.06Noncompetes and Other Restrictive Covenants . . . . . . . 325.07Standard Employment Agreement Provisions Not Found

in Consulting Agreements . . . . . . . . . . . . . . . . . . . . 325.08Special Provisions Found in Some Consulting

Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325.09Support, Supplies and Office Space . . . . . . . . . . . . . . . . 325.10


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Company and Consultant Tax Issues . . . . . . . . . . . . . . . . . . 335Consulting Payments or Cancellation of Employment

Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335.01Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335.02

Chapter 4: Noncompetes and Other Restrictive Covenants

Overview—Noncompetes and Other RestrictiveCovenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401Nondisclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401.01Nonsolicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401.02Noncompete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401.03Nondisparagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401.04Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401.05

Noncompete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415Nondisclosure and Nondisparagement . . . . . . . . . . . . . . . . 425Nonsolicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435Inventions or Developments . . . . . . . . . . . . . . . . . . . . . . . . . 445Blue Pencil Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485

Chapter 5: Retention and Compensation of Outside Board Members

Overview—Retention and Compensation of Outside BoardMembers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501Advisory Boards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501.01The Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . 501.02

Agreements with Outside Board Members . . . . . . . . . . . . . . 515Status of Board Members . . . . . . . . . . . . . . . . . . . . . . . . 515.01Appointment to the Board and Board Committees . . . . 515.02Retainer Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515.03Meeting Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515.04Equity-Based Compensation . . . . . . . . . . . . . . . . . . . . . 515.05Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . 515.06Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515.07Deferred Fee Arrangements . . . . . . . . . . . . . . . . . . . . . . 515.08Change in Control Protection . . . . . . . . . . . . . . . . . . . . . 515.09

Legal Limits on Director Compensation . . . . . . . . . . . . . . . . 525Amount of Compensation . . . . . . . . . . . . . . . . . . . . . . . 525.01Valuation of Stock Option Plans . . . . . . . . . . . . . . . . . . . 525.02Proxy Statement Disclosure . . . . . . . . . . . . . . . . . . . . . . 525.03Focus in Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525.04


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Outside Directors’ Stock Incentive Plans . . . . . . . . . . . . . . . . 535Restricted Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 535.01

SEC Disclosure and Stock Exchange Rules . . . . . . . . . . . . . . 545The Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . . . . 555Advisory Board Members . . . . . . . . . . . . . . . . . . . . . . . . . . . 565

Chapter 6: Stock Incentive Plan Design and Issues

Overview—Stock Incentive Plan Design and Issues . . . . . . . 601Types of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.01Number of Shares Authorized Under the Stock Plan . . . 601.02Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.03Eligibility for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.04Vesting of Stock Awards . . . . . . . . . . . . . . . . . . . . . . . . . 601.05Plan Provisions Unique to Stock Option Plans and

Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.06Dilution and Overhang Problems . . . . . . . . . . . . . . . . . . 601.07Special Issues for Private Company Stock Plans . . . . . . 601.08

Types of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615Number of Shares Authorized Under the Stock Plan . . . . . . 625

Reasons for Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625.01Manner of Specifying Limit . . . . . . . . . . . . . . . . . . . . . . 625.02Evergreen Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625.03Return of Shares to the Pool . . . . . . . . . . . . . . . . . . . . . . 625.04Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625.05

Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635One Million Dollar Limit . . . . . . . . . . . . . . . . . . . . . . . . 635.01Rule 16b-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635.02State Corporate Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635.03

Eligibility for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 645Vesting of Stock Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655

Limits in the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655.01Time-Based or Performance-Based Vesting . . . . . . . . . . 655.02Impact of a Change in Control of the Company on

Award Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655.03Impact of Service Termination . . . . . . . . . . . . . . . . . . . . 655.04

Other Provisions Common to All Stock Incentive Plans . . . . 665Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665.01Noncompete and Other Restrictive Covenants . . . . . . . 665.02

Plan Provisions Unique to Stock Option Plans and Awards . 675Expiration of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 675.01Payment of the Option Exercise Price . . . . . . . . . . . . . . . 675.02


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Reload Options and Awards . . . . . . . . . . . . . . . . . . . . . . 675.03Dilution and Overhang Problems . . . . . . . . . . . . . . . . . . . . . 685

Award Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 685.01Adopt a Separate Plan Not Approved by the

Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685.02Disclosure Requirements for Adopting a Separate Stock

Option Plan—Not Approved by Stockholders . . . . 685.03Special Issues for Private Company Stock Plans . . . . . . . . . . 695

Shares Authorized for Awards . . . . . . . . . . . . . . . . . . . . 695.01Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695.02Company Repurchase Rights . . . . . . . . . . . . . . . . . . . . . 695.03Participant Put Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 695.04Drag-Along and Tag-Along Rights . . . . . . . . . . . . . . . . . 695.05

Chapter 7: Stock Options

Overview—Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 701The Rationale for Compensatory Stock Options . . . . . . 701.01Stock Option Plan Requirements . . . . . . . . . . . . . . . . . . 701.02Types of Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . 701.03Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . 701.04Stock Options Compared to Warrants . . . . . . . . . . . . . . 701.05

The Rationale for Compensatory Stock Options . . . . . . . . . . 715Stock Option Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725

Awarding Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725.01The Value of a Stock Option . . . . . . . . . . . . . . . . . . . . . . 725.02Exercising a Stock Option . . . . . . . . . . . . . . . . . . . . . . . . 725.03

Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735Written Plan Requirement . . . . . . . . . . . . . . . . . . . . . . . 735.01Corporations Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.02Stockholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.03Employees Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.04Exercise Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.05Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.06ISO Holding Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.07Special Rules Applicable to Ten Percent Stockholders . . 735.08Duration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.09Tax Treatment of the Employee . . . . . . . . . . . . . . . . . . . 735.10Alternative Minimum Tax . . . . . . . . . . . . . . . . . . . . . . . 735.11Tax Treatment of the Company . . . . . . . . . . . . . . . . . . . . 735.12

Nonqualified Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . 745Tax Treatment of the Optionee . . . . . . . . . . . . . . . . . . . . 745.01


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Options with a Readily Ascertainable Value . . . . . . . . . 745.02Tax Treatment of the Company . . . . . . . . . . . . . . . . . . . . 745.03Whether to Award ISOs or NSOs . . . . . . . . . . . . . . . . . . 745.04

Accounting for Stock Options . . . . . . . . . . . . . . . . . . . . . . . . 755Variable Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755.01Accounting Rule Changes Pending . . . . . . . . . . . . . . . . 755.02

Comparing Stock Options to Warrants . . . . . . . . . . . . . . . . . 765Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765.01Warrants Differ from Options in Function and

Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765.02Considerations When Issuing Warrants . . . . . . . . . . . . . 765.03

Securities Law Reporting and Disclosure of Option Awards 775The Registration Statement on Form S-8 . . . . . . . . . . . . 775.01The Section 10(a) Prospectus . . . . . . . . . . . . . . . . . . . . . . 775.02Proxy Statement Disclosure . . . . . . . . . . . . . . . . . . . . . . 775.03

Chapter 8: Restricted Stock, Performance Shares and RSUs

Overview—Restricted Stock, Performance Shares andRSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801Contrasted with Stock Options . . . . . . . . . . . . . . . . . . . . 801.01Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801.02Performance Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801.03Restricted Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 801.04Taxation of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 801.05Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 801.06

Restricted Stock Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 815Awarding Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . 815.01Voting and Dividend Rights . . . . . . . . . . . . . . . . . . . . . . 815.02Payment for Restricted Stock . . . . . . . . . . . . . . . . . . . . . 815.03Entities That May Award Restricted Stock . . . . . . . . . . . 815.04

Comparison to Stock Options—Advantages andDisadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825

Performance Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 835Restricted Stock Units (“RSUs”) . . . . . . . . . . . . . . . . . . . . . . 845

Structure of RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845.01Taxation of RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845.02Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . 845.03Why RSUs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845.04Converting Restricted Stock to RSUs . . . . . . . . . . . . . . . 845.05Proxy Statement Disclosure . . . . . . . . . . . . . . . . . . . . . . 845.06

Taxation of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855


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Code Sec. 83(b) Election . . . . . . . . . . . . . . . . . . . . . . . . . 855.01Company’s Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . 855.02Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855.03

Securities Law Reporting and Disclosure of Awards . . . . . . 865The Registration Statement on Form S-8 . . . . . . . . . . . . 865.01The Section 10(a) Prospectus . . . . . . . . . . . . . . . . . . . . . . 865.02Proxy Statement Disclosure . . . . . . . . . . . . . . . . . . . . . . 865.03

Chapter 9: Phantom Stock and Stock Appreciation Rights

Overview—Phantom Stock and Stock Appreciation Rights . 901Private Company Issues . . . . . . . . . . . . . . . . . . . . . . . . . 901.01Stock Appreciation Rights . . . . . . . . . . . . . . . . . . . . . . . 901.02Phantom Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901.03Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901.04SAR and Phantom Stock Plan Design . . . . . . . . . . . . . . . 901.05Phantom Stock for LLCs . . . . . . . . . . . . . . . . . . . . . . . . . 901.06Accounting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901.07Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 901.08

Private Company Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915Stock Appreciation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 925

Tandem SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925.01Limited Stock Appreciation Rights . . . . . . . . . . . . . . . . . 925.02

Phantom Stock Arrangements . . . . . . . . . . . . . . . . . . . . . . . . 935Comparison to SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935.01Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935.02Types of Phantom Stock . . . . . . . . . . . . . . . . . . . . . . . . . 935.03

SAR and Phantom Stock Plan Design . . . . . . . . . . . . . . . . . . 945Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945.01Disadvantages of SARs and Phantom Stock . . . . . . . . . . 945.02Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945.03

Tax Treatment to Executive . . . . . . . . . . . . . . . . . . . . . . . . . . 955Tax Treatment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . 965Phantom Stock for LLCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 975Accounting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 985Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995

The Intrastate Offerings Exemption . . . . . . . . . . . . . . . . 995.01Rule 701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995.02

Chapter 10: Employee Stock Purchase Plans

Overview—Employee Stock Purchase Plans . . . . . . . . . . . . . 1001


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Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1001.01Internal Revenue Code Requirements . . . . . . . . . . . . . . 1001.02Design and Operational Issues . . . . . . . . . . . . . . . . . . . . 1001.03Advantage of an ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . 1001.04Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . 1001.05Federal Securities Law Issues . . . . . . . . . . . . . . . . . . . . . 1001.06Nonqualifying Stock Purchase Plans . . . . . . . . . . . . . . . 1001.07

Statutory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015.01Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015.02Permitted Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015.03Exclusion of 5% Owners . . . . . . . . . . . . . . . . . . . . . . . . . 1015.04Identical Rights and Options . . . . . . . . . . . . . . . . . . . . . 1015.05Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015.06Limitation on Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015.07Offering Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015.08Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015.09

Tax Treatment of the Employee . . . . . . . . . . . . . . . . . . . . . . . 1025Tax Treatment at Grant . . . . . . . . . . . . . . . . . . . . . . . . . . 1025.01Tax Treatment at Sale or Other Disposition of the Stock . 1025.02

Tax Treatment of the Company . . . . . . . . . . . . . . . . . . . . . . . 1035Design and Operational Issues . . . . . . . . . . . . . . . . . . . . . . . 1045

Business Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1045.01Participating Companies and Class of Stock . . . . . . . . . 1045.02Authorized Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1045.03Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1045.04Handling Employee Payroll Deductions . . . . . . . . . . . . 1045.05Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1045.06Change in Payroll Deduction and Purchase Election . . . 1045.07Employment Termination . . . . . . . . . . . . . . . . . . . . . . . . 1045.08Other Design Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1045.09

Advantages of an ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1055Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1055.01

Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1065FAS 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1065.01

Federal Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . 1075The Registration Statement on Form S-8 . . . . . . . . . . . . 1075.01The Section 10(a) Prospectus . . . . . . . . . . . . . . . . . . . . . . 1075.02No Accelerated Reporting on Form 4 . . . . . . . . . . . . . . . 1075.03

Nonqualifying Stock Purchase Plans . . . . . . . . . . . . . . . . . . . 1085


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Chapter 11: Company Loans to Executives

Introduction—Company Loans to Executives . . . . . . . . . . . . 1101Executive Loan and Stock Purchase Programs . . . . . . . . 1101.01The Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . 1101.02Other Loans to Executives . . . . . . . . . . . . . . . . . . . . . . . 1101.03“Loans” Treated as Compensation Advances . . . . . . . . . 1101.04

Executive Loan and Stock Purchase Program . . . . . . . . . . . . 1115Program Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1115.01Program Mechanics and Participation . . . . . . . . . . . . . . 1115.02Company Guarantee of the Loans . . . . . . . . . . . . . . . . . 1115.03Regulation U . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1115.04Executives’ Repayments of the Loans . . . . . . . . . . . . . . . 1115.05Sale, Transfer, Pledge or Other Disposition of the

Purchased Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1115.06Employment Termination Before Repaying the Loan . . 1115.07What If the Executive Cannot Continue Loan

Repayments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1115.08Effect of the Company’s Insolvency . . . . . . . . . . . . . . . . 1115.09Effect of the Sale or Merger of the Company . . . . . . . . . 1115.10Participating Executive’s Rights as a Stockholder . . . . . 1115.11Communicating the Program . . . . . . . . . . . . . . . . . . . . . 1115.12Additional Securities Law Considerations . . . . . . . . . . . 1115.13The Stock Purchase Loan’s Effect on the Executive’s

Credit Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1115.14Offering the Program Again at a Later Date . . . . . . . . . . 1115.15

The Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . . . . 1125Companies Affected by SOX Section 402 . . . . . . . . . . . . 1125.01Individuals Affected by SOX Section 402 . . . . . . . . . . . . 1125.02“Loans” Affected by SOX Section 402 . . . . . . . . . . . . . . . 1125.03Existing Loans and Private Companies . . . . . . . . . . . . . 1125.04

Other Types of Company Loans . . . . . . . . . . . . . . . . . . . . . . 1135Compensation-Related Loans . . . . . . . . . . . . . . . . . . . . . 1135.01Corporation-Stockholder Loans . . . . . . . . . . . . . . . . . . . 1135.02Demand Loans v. Term Loans . . . . . . . . . . . . . . . . . . . . 1135.03Employee Relocation Loans . . . . . . . . . . . . . . . . . . . . . . 1135.04

“Loans” Treated as Compensation Advances . . . . . . . . . . . . 1145Timing of the Company’s Deduction . . . . . . . . . . . . . . . 1145.01


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Chapter 12: Securities Law Compliance Issues Relating to ExecutiveCompensation Plans

Overview—Securities Law Compliance Issues Relating toExecutive Compensation Plans . . . . . . . . . . . . . . . . . . . 1201Types of Employee Benefits Plans . . . . . . . . . . . . . . . . . 1201.01Approval Process and Disclosure . . . . . . . . . . . . . . . . . . 1201.02Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1201.03Prospectus Delivery and Updating Obligations . . . . . . . 1201.04Resales by Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 1201.05Rule 10b5-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1201.06Section 16 of the Exchange Act . . . . . . . . . . . . . . . . . . . . 1201.07Proxy Statement Disclosure . . . . . . . . . . . . . . . . . . . . . . 1201.08Private Company Securities Law Issues . . . . . . . . . . . . . 1201.09

The Approval Process (Board and Shareholder) . . . . . . . . . . 1215Board Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1215.01Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . 1215.02

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1225Definitive Proxy Statements . . . . . . . . . . . . . . . . . . . . . . 1225.01Form 11-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1225.02New Disclosure Requirements . . . . . . . . . . . . . . . . . . . . 1225.03

Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1235The Registration Statement on Form S-8 . . . . . . . . . . . . 1235.01The Section 10(a) Prospectus . . . . . . . . . . . . . . . . . . . . . . 1235.02Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1235.03

Prospectus Delivery and Updating Obligations . . . . . . . . . . 1245Resales by Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1255

Reoffer Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1255.01Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1255.02

Rule 10b5-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1265Section 16 of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . 1275

Executives and Directors Subject to Section 16 . . . . . . . . 1275.01Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 1275.02Short-Swing Profit Liability . . . . . . . . . . . . . . . . . . . . . . 1275.03Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1275.04Short Sales and Short Sales Against the Box . . . . . . . . . . 1275.05Compliance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . 1275.06

Proxy Statement Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 1285Stockholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . 1285.01Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1285.02Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1285.03Section 16 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1285.04


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Private Company Securities Law Issues . . . . . . . . . . . . . . . . 1295The Intrastate Offerings Exemption . . . . . . . . . . . . . . . . 1295.01Rule 701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1295.02State Blue Sky Laws and Exemptions . . . . . . . . . . . . . . . 1295.03

Chapter 13: Other Stock Option Plan Issues

Overview—Other Stock Option Plan Issues . . . . . . . . . . . . . 1301Deferral of Stock Option Election Gains . . . . . . . . . . . . . 1301.01Transferable Stock Options . . . . . . . . . . . . . . . . . . . . . . . 1301.02Underwater Stock Options . . . . . . . . . . . . . . . . . . . . . . . 1301.03Reload Option Feature . . . . . . . . . . . . . . . . . . . . . . . . . . 1301.04

Deferral of Stock Option Gains . . . . . . . . . . . . . . . . . . . . . . . 1315Stock Option Plan Provisions and Mechanics . . . . . . . . 1315.01Nonqualified Deferred Compensation Plan Provisions . 1315.02Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1315.03

Transfers of Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 1325The Rationale for Transferring Stock Options . . . . . . . . 1325.01Tax Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1325.02Plan Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1325.03Legal Considerations and Requirements . . . . . . . . . . . . 1325.04Transferable Stock Options . . . . . . . . . . . . . . . . . . . . . . . 1325.05

Underwater Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . 1335Reprice the Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1335.01Award New Options Without Canceling the Underwater

Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1335.02Cancel the Underwater Options and Grant New Options

at the Current Price . . . . . . . . . . . . . . . . . . . . . . . . . 1335.03Repurchase the Options . . . . . . . . . . . . . . . . . . . . . . . . . 1335.04Cancel or Repurchase the Options and Award Restricted

Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1335.05Synthetic Repricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1335.06

Reload Options and Awards . . . . . . . . . . . . . . . . . . . . . . . . . 1345

Chapter 14: Severance and Retention Benefit Plans

Introduction—Severance and Retention Benefit Plans . . . . . 1401Severance Plan Design . . . . . . . . . . . . . . . . . . . . . . . . . . 1401.01Retention Plan Design . . . . . . . . . . . . . . . . . . . . . . . . . . . 1401.02Taxation of Severance Payments . . . . . . . . . . . . . . . . . . . 1401.03ERISA Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1401.04Implementation Steps for a Severance Plan . . . . . . . . . . 1401.05

Severance Plan Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1415


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Executive Severance Benefits . . . . . . . . . . . . . . . . . . . . . 1415.01Broad-Based Severance Plans . . . . . . . . . . . . . . . . . . . . . 1415.02Event-Based Severance Plans . . . . . . . . . . . . . . . . . . . . . 1415.03Eligibility for Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 1415.04Amount of Severance Payments . . . . . . . . . . . . . . . . . . . 1415.05Continuation of Health Benefits . . . . . . . . . . . . . . . . . . . 1415.06Other Severance Plan Terms . . . . . . . . . . . . . . . . . . . . . . 1415.07

Retention Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1425Retention Plan Design . . . . . . . . . . . . . . . . . . . . . . . . . . . 1425.01Retention in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . 1425.02Retention in an Acquisition Situation . . . . . . . . . . . . . . . 1425.03Preliminary Design Considerations . . . . . . . . . . . . . . . . 1425.04Which Executives and Employees Are Eligible for

Retention Payments . . . . . . . . . . . . . . . . . . . . . . . . . 1425.05The Amount of Payments . . . . . . . . . . . . . . . . . . . . . . . . 1425.06Until What Time Should the Company Require

Employees to Stay to Receive Payments? . . . . . . . . 1425.07Whether to Make Payments in Cash or Some Other Form

of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1425.08Whether to Prefund the Retention Program . . . . . . . . . . 1425.09Whether the Buyer Pays Some of the Retention Payment

Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1425.10Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1435

Supplemental Unemployment Compensation May NotBe Subject to FICA . . . . . . . . . . . . . . . . . . . . . . . . . . 1435.01

Consulting Payments or Cancellation of EmploymentAgreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1435.02

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1435.03Status as an ERISA-Governed Plan . . . . . . . . . . . . . . . . . . . . 1445

Status as a Welfare or Pension Plan . . . . . . . . . . . . . . . . 1445.01Advantages and Disadvantages of Being Subject to

ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1445.02Implementation Steps for a Severance Plan . . . . . . . . . . . . . 1455

Chapter 15: Nonequity-Based Incentive Compensation

Introduction—Nonequity-Based Incentive Compensation . . 1501The Advantages of Incentive Compensation . . . . . . . . . 1501.01Taxation of Nonequity Compensation . . . . . . . . . . . . . . 1501.02Structuring Incentive Compensation . . . . . . . . . . . . . . . 1501.03

The Advantages of Nonequity-Based IncentiveCompensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1515


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Superior Line of Sight . . . . . . . . . . . . . . . . . . . . . . . . . . . 1515.01Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1515.02Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1515.03Favorable Accounting Treatment Disappearing . . . . . . . 1515.04Increased Use of Dividends . . . . . . . . . . . . . . . . . . . . . . 1515.05The Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . 1515.06

Taxation of Incentive Compensation . . . . . . . . . . . . . . . . . . . 1525Comparison to Equity Compensation . . . . . . . . . . . . . . 1525.01“Performance-Based” Compensation Under Code Sec.

162(m) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1525.02Compensation Deferral Opportunities . . . . . . . . . . . . . . 1525.03

Structuring Incentive Compensation . . . . . . . . . . . . . . . . . . . 1535Setting Sights on Long-Term Goals . . . . . . . . . . . . . . . . . 1535.01Options for Structuring Incentive Compensation . . . . . . 1535.02A Tailored Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1535.03

Chapter 16: Qualified Retirement Plans

Introduction—Qualified Retirement Plans . . . . . . . . . . . . . . 1601Qualification Requirements . . . . . . . . . . . . . . . . . . . . . . 1601.01Favorable Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . 1601.02Source of Law and Regulation . . . . . . . . . . . . . . . . . . . . 1601.03Pension Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1601.04Defined Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1601.05Defined Contribution or Individual Account Plans . . . . 1601.06Limitations on Qualified Plans . . . . . . . . . . . . . . . . . . . . 1601.07

Qualification Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 1615Nondiscrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.01Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.02Plan Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.03Deductibility Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.04Plan Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.05Fiduciary Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.06Reporting and Disclosure Requirements . . . . . . . . . . . . 1615.07Claims Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.08Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1615.09

Favorable Tax Treatment of Qualified Plans . . . . . . . . . . . . . 1625Defined Benefit Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . 1635

Defined Benefit Plan Characteristics . . . . . . . . . . . . . . . . 1635.01Alternative Defined Benefit Plan Designs . . . . . . . . . . . 1635.02

Defined Contribution—Individual Account Plans . . . . . . . . 1645401(k) Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1645.01


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Employee Stock Ownership Plans . . . . . . . . . . . . . . . . . 1645.02Money Purchase Pension Plan . . . . . . . . . . . . . . . . . . . . 1645.03

Limitations on Qualified Plan Benefits . . . . . . . . . . . . . . . . . 1655Code Sec. 401(a)(17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1655.01Code Sec. 415 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1655.02Code Sec. 402(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1655.03Code Sec. 410(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1655.04

Protection of Retirement Plan Benefits in Bankruptcy . . . . . 1665Bankruptcy of a Plan Participant . . . . . . . . . . . . . . . . . . 1665.01What Plans Are Protected by ERISA? . . . . . . . . . . . . . . . 1665.02Keogh/Self-Employed Plans . . . . . . . . . . . . . . . . . . . . . 1665.03What Plans Are Not Protected by ERISA? . . . . . . . . . . . 1665.04Assets Subject to Withdrawal . . . . . . . . . . . . . . . . . . . . . 1665.05Nonqualified Retirement Plans . . . . . . . . . . . . . . . . . . . . 1665.06State Exemption Statutes . . . . . . . . . . . . . . . . . . . . . . . . 1665.07ERISA Welfare Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 1665.08Misconduct of the Plan Participant . . . . . . . . . . . . . . . . . 1665.09Qualified Domestic Relations Orders . . . . . . . . . . . . . . . 1665.10What Is a QDRO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1665.11QDRO Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1665.12Bankruptcy of the Plan Sponsor . . . . . . . . . . . . . . . . . . . 1665.13Voidable Transfer Rules . . . . . . . . . . . . . . . . . . . . . . . . . 1665.14Government Contractors . . . . . . . . . . . . . . . . . . . . . . . . 1665.15

Chapter 17: Nonqualified Retirement and Deferred CompensationPlans

Overview—Nonqualified Retirement and DeferredCompensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1701FICA/Medicare Taxation of Nonqualified Plan

Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1701.01Application of ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . 1701.02The Problem with Qualified Plans . . . . . . . . . . . . . . . . . 1701.03Types of Nonqualified Plans . . . . . . . . . . . . . . . . . . . . . . 1701.04Other Nonqualified Plan Design Issues . . . . . . . . . . . . . 1701.05Tax Treatment of Nonqualified Plans . . . . . . . . . . . . . . . 1701.06“Funding” Nonqualified Plan Benefits . . . . . . . . . . . . . . 1701.07Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 1701.08Special Rules for Tax-Exempt Employers . . . . . . . . . . . . 1701.09Top-Hat Plan Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 1701.10

The Problem with Qualified Plans . . . . . . . . . . . . . . . . . . . . 1715Code Sec. 401(a)(17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1715.01


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Code Sec. 415 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1715.02Code Sec. 402(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1715.03Code Sec. 410(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1715.04Impact of the Code Limits on Qualified Retirement

Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1715.05Making Whole the Affected Executives . . . . . . . . . . . . . 1715.06

Tax Treatment of Nonqualified Plans . . . . . . . . . . . . . . . . . . 1725Comparison to Qualified Plans . . . . . . . . . . . . . . . . . . . . 1725.01Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1725.02Advance IRS Approval . . . . . . . . . . . . . . . . . . . . . . . . . . 1725.03Constructive Receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1725.04The Economic Benefit Doctrine . . . . . . . . . . . . . . . . . . . . 1725.05

FICA/Medicare Taxation of Nonqualified Plan Benefits . . . 1735Guidance Under the Final Regulations . . . . . . . . . . . . . . 1735.01The “Amount Deferred” . . . . . . . . . . . . . . . . . . . . . . . . . 1735.02Income and Reasonable Rate of Interest . . . . . . . . . . . . . 1735.03Timing of Inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1735.04Withholding Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1735.05Defined Benefit Excess Plan . . . . . . . . . . . . . . . . . . . . . . 1735.06Defined Contribution Excess Plan . . . . . . . . . . . . . . . . . 1735.07

Application of ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740Not an ERISA Pension Plan . . . . . . . . . . . . . . . . . . . . . . 1740.01ERISA Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.02Top-Hat Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.03One-Person Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.04Excess Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.05ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.06

Types of Nonqualified Plans . . . . . . . . . . . . . . . . . . . . . . . . . 1745Defined Benefit or Individual Account . . . . . . . . . . . . . . 1745.01Supplemental Executive Retirement Plan (“SERP”) . . . . 1745.02Floor SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.03Excess Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.04Mirror Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1740.05Nonqualified Plan for Directors . . . . . . . . . . . . . . . . . . . 1740.06“QSERP” and “Stay-for-Pay” Plans . . . . . . . . . . . . . . . . 1740.07Special Purpose Nonqualified Plans . . . . . . . . . . . . . . . . 1740.08

Other Nonqualified Plan Design Issues . . . . . . . . . . . . . . . . 1755Strict IRS Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 1755.01Eligibility and Participation . . . . . . . . . . . . . . . . . . . . . . 1755.02Contributions and Benefits . . . . . . . . . . . . . . . . . . . . . . . 1755.03Compensation Deferral Requirements . . . . . . . . . . . . . . 1755.04


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Period of Deferral—Distributions . . . . . . . . . . . . . . . . . . 1755.05Hardship Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 1755.06Early Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1755.07Defining “Compensation” . . . . . . . . . . . . . . . . . . . . . . . 1755.08Investments and Interest Crediting . . . . . . . . . . . . . . . . 1755.09Plan Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1755.10Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 1755.11Deferral of Stock Option Gains . . . . . . . . . . . . . . . . . . . . 1755.12Change in Control Provisions . . . . . . . . . . . . . . . . . . . . . 1755.13Automatic Distribution Trigger . . . . . . . . . . . . . . . . . . . 1755.14Other Plan Design Features . . . . . . . . . . . . . . . . . . . . . . 1755.15

“Funding” Nonqualified Plan Benefits . . . . . . . . . . . . . . . . . 1765Rabbi Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1765.01Tax Treatment of Rabbi Trusts . . . . . . . . . . . . . . . . . . . . . 1765.02Insuring the Employer’s Obligation to Pay . . . . . . . . . . 1765.03Secular Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1765.04Airline Financial Woes Lead to a Surge in Secular Trust

Popularity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1765.05Company Stock in a Rabbi Trust . . . . . . . . . . . . . . . . . . . 1765.06Springing Rabbi Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 1765.07Nonqualified Plan Provisions in the 2003 Senate-Passed

Tax Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1765.08Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1775

Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1775.01Updating the Plan Prospectus . . . . . . . . . . . . . . . . . . . . 1775.02Short-Swing Profits Penalties . . . . . . . . . . . . . . . . . . . . . 1775.03

Special Rules for Tax-Exempt Employers . . . . . . . . . . . . . . . 1785Top-Hat Plan Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1795

Qualification Under ERISA as a Top-Hat Plan . . . . . . . . 1795.01Top-Hat Plans as Unilateral Contracts . . . . . . . . . . . . . . 1795.02Amendments to Top-Hat Plans . . . . . . . . . . . . . . . . . . . . 1795.03Forfeiture Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1795.04Damage Awards and Fee-Shifting Provisions . . . . . . . . 1795.05Standard of Review for Plan Administrator’s

Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1795.06Vesting in Top-Hat Plans . . . . . . . . . . . . . . . . . . . . . . . . . 1795.07Preemption Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1795.08Interpretation of Provisions . . . . . . . . . . . . . . . . . . . . . . 1795.09Breach of Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . 1795.10Changes in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1795.11


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Interference with an Employee’s Right to Receive PlanBenefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1795.12

Priority in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . 1795.13

Chapter 18: Split-Dollar Life Insurance Arrangements

Overview—Split-Dollar Life Insurance Arrangements . . . . . 1801Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1801.01Types of Split-Dollar Arrangements . . . . . . . . . . . . . . . . 1801.02Notice 2002-59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1801.03The Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . 1801.04SERP Swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1801.05

Split-Dollar Life Insurance Defined . . . . . . . . . . . . . . . . . . . . 1815Types of Split-Dollar Arrangements . . . . . . . . . . . . . . . . . . . 1825

Collateral Assignment Split-Dollar Arrangements . . . . . 1825.01Endorsement Split-Dollar Arrangements . . . . . . . . . . . . 1825.02Equity Split-Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1825.03

Taxation of Split-Dollar Arrangements . . . . . . . . . . . . . . . . . 1835Split-Dollar Arrangements Entered Into Before 2002 . . . 1835.01Proposed Regulations and Notice 2002-8 . . . . . . . . . . . . 1835.02Economic Benefit Regime . . . . . . . . . . . . . . . . . . . . . . . . 1835.032003 Final Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . 1835.04Loan Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1835.05Employer’s Action for Outstanding Split-Dollar

Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1835.06Notice 2002-59 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1845The Sarbanes-Oxley Act of 2002 . . . . . . . . . . . . . . . . . . . . . . 1855

Companies Affected by SOX Section 402 . . . . . . . . . . . . 1855.01Individuals Affected by SOX Section 402 . . . . . . . . . . . . 1855.02

SERP Swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1865Flexibility for Participants . . . . . . . . . . . . . . . . . . . . . . . . 1865.01Taxation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1865.02

Chapter 19: Health and Welfare Benefit Plans

Introduction—Health and Welfare Benefit Plans . . . . . . . . . 1901Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1901.01Retiree Medical Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 1901.02Disability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1901.03Medical and Health Benefits . . . . . . . . . . . . . . . . . . . . . . 1901.04Severance Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1901.05Sources of Law and Regulation . . . . . . . . . . . . . . . . . . . 1901.06Flexible Benefit—“Cafeteria” Plans . . . . . . . . . . . . . . . . 1901.07


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Application of ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1915ERISA Preemption of State Laws . . . . . . . . . . . . . . . . . . 1915.01ERISA’s Protection Against Retaliatory Termination . . . 1915.02

Group Health Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1925Insured Medical Benefit Plans v. Self-Insured Plans . . . 1925.01Eligibility for Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . 1925.02HIPAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1925.03COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1925.04

Executive Supplemental Health Benefit Plans . . . . . . . . . . . 1935Other Types of Welfare Benefit Plans . . . . . . . . . . . . . . . . . . 1945

Life Insurance Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1945.01Disability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1945.02

Retiree Medical Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1955Funding Retiree Medical Benefits . . . . . . . . . . . . . . . . . . 1955.01

Flexible Benefit—“Cafeteria” Plans . . . . . . . . . . . . . . . . . . . . 1965HRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1965.01

Chapter 20: Executive Compensation Litigation

Overview—Executive Compensation Litigation . . . . . . . . . . 2001Litigation over Stock Awards . . . . . . . . . . . . . . . . . . . . . 2001.01Litigation over Employment Agreement Provisions and

Other Compensation . . . . . . . . . . . . . . . . . . . . . . . . 2001.02Litigation over Employment Termination . . . . . . . . . . . 2001.03

Litigation over Stock Awards . . . . . . . . . . . . . . . . . . . . . . . . 2015Forfeiture of Nonvested Options Under Noncompete

Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015.01Duty of Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015.02Sale of Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015.03Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015.04Procedural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015.05Status as ERISA Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015.06Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015.07

Litigation over Employment Agreement Provisions andOther Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025Contract Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025.01Fee-Shifting Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 2025.02Treatment of “Compensation” for Various Purposes . . . 2025.03

Litigation over Employment Termination . . . . . . . . . . . . . . . 2035Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2035.01Voluntary Resignation v. Constructive Discharge . . . . . 2035.02


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Other Alleged Failures to Follow the Terms of theAgreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2035.03

Wrongful Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 2035.04Termination for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . 2035.05

Chapter 21: Role of Shareholders and Board of Directors inExecutive Compensation

Overview—Role of Shareholders and Board of Directors inExecutive Compensation . . . . . . . . . . . . . . . . . . . . . . . . 2101Board of Directors’ Responsibility and Potential

Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2101.01Stockholders’ Role in Executive Compensation . . . . . . . 2101.02Disclosure to Stockholders . . . . . . . . . . . . . . . . . . . . . . . 2101.03Executive Compensation in ESOP-Owned Companies . 2101.04NYSE and NASDAQ Corporate Governance Reform

Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2101.05Board of Directors’ Responsibility . . . . . . . . . . . . . . . . . . . . . 2115

Statutory Reasons for Director Approval . . . . . . . . . . . . 2115.01Director Liability for Excessive Executive Compensation . . . 2125

The Disney Case: Round One . . . . . . . . . . . . . . . . . . . . . 2125.01The Demand Requirement . . . . . . . . . . . . . . . . . . . . . . . 2125.02Breach of Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . 2125.03Corporate Waste . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2125.04The Disney Case: Round Two . . . . . . . . . . . . . . . . . . . . . 2125.05The Business Judgment Rule . . . . . . . . . . . . . . . . . . . . . 2125.06Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . 2125.07Shareholder Ratification . . . . . . . . . . . . . . . . . . . . . . . . . 2125.08Executive Compensation for Past Performance . . . . . . . 2125.09Reliance on a Compensation Expert . . . . . . . . . . . . . . . . 2125.10The Corporate Law of Other States . . . . . . . . . . . . . . . . 2125.11

Shareholder Approval Requirements . . . . . . . . . . . . . . . . . . 2135Protection from Section 16(b) of the Securities Exchange

Act of 1934 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2135.01Protection from Code Sec. 162(m) . . . . . . . . . . . . . . . . . . 2135.02Compliance with Code Sec. 422 for Incentive Stock

Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2135.03Stock Exchange Listing Requirements . . . . . . . . . . . . . . . . . . 2145

Pre-2003 Shareholder Approval Requirements . . . . . . . . 2145.012003 Changes to NYSE and NASDAQ Shareholder

Approval Requirements . . . . . . . . . . . . . . . . . . . . . 2145.02Disclosure to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . 2155


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Executive Compensation in ESOP-Owned Companies . . . . 2165NYSE and NASDAQ Corporate Governance Reform

Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2175NYSE Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2175.01The NASDAQ Proposal . . . . . . . . . . . . . . . . . . . . . . . . . 2175.02

Chapter 22: Deductibility of Executive Compensation

Introduction—Deductibility of Executive Compensation . . . 2201Code Sec. 162(m)—$1 Million Deductibility Limit . . . . . 2201.01“Reasonable Compensation” . . . . . . . . . . . . . . . . . . . . . 2201.02

The Deductibility Limit of Code Sec. 162(m) . . . . . . . . . . . . . 2215Limit Applies Only to Publicly Held Corporations . . . . 2215.01Employees Whose Compensation Is Subject to the

Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2215.02Compensation Subject to $1 Million Deduction Limit . . 2215.03Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2215.04Qualified Performance-Based Compensation . . . . . . . . . 2215.05Stock Options and Stock Appreciation Rights as

Performance-Based Compensation . . . . . . . . . . . . . 2215.06Coordination with the Golden Parachute Rules . . . . . . . 2215.07Companies That Become Publicly Held Corporations . . 2215.08Binding Contracts in Effect on February 17, 1993 . . . . . . 2215.09

Deductions Limited to Reasonable Compensation . . . . . . . . 2225The Code and the Treasury Regulations . . . . . . . . . . . . . 2225.01Multi-factor Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 2225.02Independent Investor Test . . . . . . . . . . . . . . . . . . . . . . . 2225.03Practice Tips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2225.04Legislation of Deductible Dividends . . . . . . . . . . . . . . . 2225.05

Chapter 23: Executive Compensation Issues for MultinationalEmployers

Introduction—Executive Compensation Issues forMultinational Employers . . . . . . . . . . . . . . . . . . . . . . . . 2301Taxation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2301.01Retirement Plan Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 2301.02Stock Plan Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2301.03Health and Welfare Benefit Plan Issues . . . . . . . . . . . . . 2301.04Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2301.05Employment Discrimination . . . . . . . . . . . . . . . . . . . . . 2301.06

Tax Issues for Employee and Employer . . . . . . . . . . . . . . . . 2315Tax Equalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2315.01


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Deferred Compensation and Equity Compensation . . . . 2315.02U.S. Estate and Gift Taxes Applicable to NRAs . . . . . . . 2315.03

Pension and Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . 2325Equity Compensation Outside the U.S. . . . . . . . . . . . . . . . . . 2335

Exchange Control Laws . . . . . . . . . . . . . . . . . . . . . . . . . 2335.01Severance Benefit Issues . . . . . . . . . . . . . . . . . . . . . . . . . 2335.02Restrictions on the Transfer of Employee Data . . . . . . . . 2335.03Restrictions on Amending Plans or Halting Awards . . . 2335.04Communications Issues . . . . . . . . . . . . . . . . . . . . . . . . . 2335.05Taxation and Deductibility Issues . . . . . . . . . . . . . . . . . . 2335.06Registration and Other Governmental Filing

Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2335.07Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2335.08

Issues for Foreign Corporations Making Equity Awards inthe U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2345Rule 701 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2345.01The Foreign Private Issuer Exemption . . . . . . . . . . . . . . 2345.02Large Foreign Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . 2345.03The Alternatives for Foreign Issuers . . . . . . . . . . . . . . . . 2345.04

Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2355Health and Welfare Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 2365Title VII and Employment Discrimination . . . . . . . . . . . . . . 2375

Chapter 24: Executive Compensation in Bankruptcy

Overview—Executive Compensation in Bankruptcy . . . . . . 2401Cap on Claims Arising from Termination of Employee

Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2401.01Severance and Retention Payments by Companies in

Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2401.02Retirement and Other Benefit Plans of Bankrupt

Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2401.03Preferential and Fraudulent Transfers . . . . . . . . . . . . . . 2401.04Bankruptcy of the Executive . . . . . . . . . . . . . . . . . . . . . . 2401.05Bankruptcy of an Executive Holding Stock Options . . . 2401.06

Cap on Claims Arising from Termination of EmployeeContracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2415

Severance and Retention Payments by Companies inBankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2425Severance Plans Established After Bankruptcy Filing . . 2425.01Severance Plans Established Before Bankruptcy Filing . 2425.02Approval of Post-Petition Retention/Stay Bonuses . . . . 2425.03


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The Rationale for Severance and Retention Plans at aBankrupt Company . . . . . . . . . . . . . . . . . . . . . . . . . 2425.04

The Argument Against Severance and Retention Plans ata Bankrupt Company . . . . . . . . . . . . . . . . . . . . . . . 2425.05

Basis for Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2425.06Retirement and Other Benefit Plans of Bankrupt

Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2435Qualified Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . 2435.01Nonqualified Plans in Bankruptcy . . . . . . . . . . . . . . . . . 2435.02Delta Air Lines Retention Program . . . . . . . . . . . . . . . . . 2435.03Delta’s Retention Program . . . . . . . . . . . . . . . . . . . . . . . 2435.04Funding Delta’s Nonqualified Retirement Plan . . . . . . . 2435.05Health Care Plans—COBRA Continuation Coverage . . 2435.06Health Care—Retiree Medical Benefits . . . . . . . . . . . . . . 2435.07

Preferential and Fraudulent Transfers . . . . . . . . . . . . . . . . . . 2445Preferential Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . 2445.01Fraudulent Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2445.02Other Avoidance Powers . . . . . . . . . . . . . . . . . . . . . . . . 2445.03

Bankruptcy of the Executive . . . . . . . . . . . . . . . . . . . . . . . . . 2455Qualified Retirement Plan Benefits . . . . . . . . . . . . . . . . . 2455.01What Plans Does ERISA Protect? . . . . . . . . . . . . . . . . . . 2455.02What Plans Are Not Protected by ERISA? . . . . . . . . . . . 2455.03Assets Subject to Withdrawal . . . . . . . . . . . . . . . . . . . . . 2455.04State Exemption Statutes . . . . . . . . . . . . . . . . . . . . . . . . 2455.05

Bankruptcy of an Executive Holding Stock Options . . . . . . . 2465Including the Value of Unvested Options in the

Bankruptcy Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 2465.01

Chapter 25: Executive Compensation in Mergers and Acquisitions

Overview—Executive Compensation in Mergers andAcquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2501The Goals of Executive Compensation in a Merger or

Acquisition Situation . . . . . . . . . . . . . . . . . . . . . . . . 2501.01Tackling Executive Compensation in a Merger or

Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2501.02Understanding the Transaction . . . . . . . . . . . . . . . . . . . . 2501.03Differing Goals of Buyer and Seller . . . . . . . . . . . . . . . . 2501.04Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2501.05Negotiating Employee Benefit Representations and

Warranties and Covenants . . . . . . . . . . . . . . . . . . . . 2501.06Stock Award Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2501.07


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Executive Compensation Issues in a Transaction . . . . . . . . . 2515Retaining the Company’s Executives During a

Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2515.01Change in Control Agreements . . . . . . . . . . . . . . . . . . . 2515.02Allow the Buyer to Retain Key Executives After the

Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2515.03Encourage the Executives to Work for the Highest Sale

Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2515.04Terms and Provisions That Impede a Transaction . . . . . 2515.05Protect the Executives from Employment Termination by

the Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2515.06Create Adverse Tax or Securities Law Results . . . . . . . . 2515.07

Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2525Sale of Stock or Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2525.01Seller’s Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . 2525.02Buyers’ Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . 2525.03Eliciting Critical Information in the Representations and

Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2525.04Negotiating Representations, Warranties and Covenants . . . 2535

Compliance with Applicable Securities Laws . . . . . . . . 2535.01Vesting of Outstanding, Unvested Awards . . . . . . . . . . 2535.02Seller’s Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2535.03Assumption, Substitution or Cash-Out of Outstanding

Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2535.04Registration of Assumed Stock Plan . . . . . . . . . . . . . . . . 2535.05Changes Prior to Closing . . . . . . . . . . . . . . . . . . . . . . . . 2535.06

Stock Compensation Issues in a Change in Control . . . . . . . 2545Stock Plan Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2545.01Assumption of Awards or Substitution? . . . . . . . . . . . . . 2545.02Why Select Assumption of Awards over Substitution? . 2545.03ISOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2545.04Cash-Out of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2545.05Cancellation of Options . . . . . . . . . . . . . . . . . . . . . . . . . 2545.06Accounting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2545.07Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 2545.08Public Company Assumption of Acquired Private

Company’s Stock Plan . . . . . . . . . . . . . . . . . . . . . . . 2545.09Spin-off of a Subsidiary to Become a Separate Publicly Held

Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2555ISOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2555.01Code Sec. 162(m) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2555.02Bifurcated Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2555.03


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Conversion of Outstanding Awards . . . . . . . . . . . . . . . . . . . 2565When Conversion Is Not Available . . . . . . . . . . . . . . . . 2565.01Earn-Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2565.02Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2565.03

Prefunding Stock-Based Compensation: Stock EmployeeCompensation Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 2575SECT Design and Operation . . . . . . . . . . . . . . . . . . . . . . 2575.01Voting and Tendering of SECT Shares . . . . . . . . . . . . . . 2575.02Amendment and Termination Provisions . . . . . . . . . . . . 2575.03Tax Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2575.04

Chapter 26: Executive Compensation for Tax-Exempt Entities

Overview—Executive Compensation for Tax-ExemptEntities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2601Types of Tax-Exempt Entities . . . . . . . . . . . . . . . . . . . . . 2601.01Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 2601.02Excess Benefit Transactions . . . . . . . . . . . . . . . . . . . . . . . 2601.03

Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615Annual Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.01Deferral Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.02Catch-Up Contributions . . . . . . . . . . . . . . . . . . . . . . . . . 2615.03Coordination Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.04Sick and Vacation Pay Deferrals . . . . . . . . . . . . . . . . . . . 2615.05Excess Deferrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.06Minimum Distribution Requirements . . . . . . . . . . . . . . 2615.07Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.08Plan Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.09Plan-to-Plan Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.10Qualified Domestic Relations Orders (“QDROs”) . . . . . 2615.11Taxation of and Withholding on Distributions . . . . . . . . 2615.12Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.13Correction Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.14Ineligible Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.15Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2615.16

Excess Benefit Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 2635Intermediate Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . 2635.01Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2635.02Disqualified Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2635.03Excess Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2635.04Rebuttable Presumption Against Excess Benefits . . . . . . 2635.05Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2635.06


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Comparability Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2635.07Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2635.08

Chapter 27: Executive Compensation in the Context of Divorce

Overview—Executive Compensation in the Context ofDivorce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2701Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2701.01Other Deferred Compensation Plans . . . . . . . . . . . . . . . 2701.02Tax Consequences of Transferring Options and Deferred

Compensation Incident to Divorce . . . . . . . . . . . . . 2701.03Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 2701.04

Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2715Are Stock Options Marital Assets to Be Distributed upon

a Dissolution of Marriage? . . . . . . . . . . . . . . . . . . . 2715.01Examples of State Laws . . . . . . . . . . . . . . . . . . . . . . . . . 2715.02Valuation and Distribution of Stock Options . . . . . . . . . 2715.03

Other Deferred Compensation Plans . . . . . . . . . . . . . . . . . . . 2735Tax Consequences of Transferring Options and Deferred

Compensation Incident to Divorce . . . . . . . . . . . . . . . . . 2745FICA and FUTA Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 2745.01

Securities Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2755Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2755.01

Practice Tools

Sample Legal Agreement—Executive EmploymentAgreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,010

Checklist—Employment Agreement Checklist . . . . . . . . . . . 10,020Checklist—Change in Control Agreements Checklist . . . . . . 10,030Sample Legal Agreement—Consulting/Independent

Contractor Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 10,040Checklist—Checklist of Compensation to Outside Board

Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,050Sample Correspondence—Sample Offer Letter . . . . . . . . . . . 10,060Sample Legal Agreement—Restrictive Covenants

Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,070Sample Correspondence—Sample Offer Letter for Outside

Board Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,080Sample Legal Agreement—Sample Agreement for Advisory

Board Member ABC Corporation . . . . . . . . . . . . . . . . . . 10,090Sample Legal Agreement—Sample Retention Payment

Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,100


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Sample Legal Agreement—Sample Retention Payment LetterAgreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,110

Decision Tree—Retention Payment Program DecisionTree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,120

Sample Legal Agreement—Sample Restricted Stock UnitAgreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,130

Sample Legal Agreement—Corporation Phantom Stock Planand Award Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 10,140

Sample Legal Agreement—Stock Appreciation RightsAgreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,150

Checklist—Employee Stock Purchase Plan Checklist . . . . . . 10,160Sample Language—Sample Language to Permit Transferable

Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,170Form—Stock Option Deferral Election . . . . . . . . . . . . . . . . . 10,180Sample Legal Agreement—Incentive Compensation

Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,190Illustration—Employee Benefit Plans Under ERISA . . . . . . . 10,200Sample Language—Sample SERP Swap Amendment . . . . . 10,210Sample Language—Qualified Retirement Plan Provisions . . 10,220Sample Legal Agreement—Sample Nonqualified Retirement

Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,230Sample Legal Agreement—Split-dollar Group Plan . . . . . . . 10,240Sample Language—Special Welfare Benefit Provisions for

Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,250Sample Legal Agreement—Severance Pay Plan . . . . . . . . . . 10,260Sample Legal Agreement—Model Rabbi Trust . . . . . . . . . . . 10,270Sample Correspondence—Sample Secondment Letter . . . . . 10,280Sample Language—Sample Provisions for Merger and

Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,290Sample Legal Document—Sample Compensation Committee

Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,300Sample Legal Agreement—Stock Incentive Award Plan . . . 10,310Sample Legal Agreement—Stock Option Award

Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,320Sample Legal Agreement—Restricted Stock Award

Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,330Sample Legal Agreement—Performance Share Award

Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,340Illustration—Examples of Incentive Stock Option Tax

Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,350

PageIndex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767


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