Post on 15-Feb-2018
Executive Compensation Tax Issues in Mergers and Acquisitions Navigating Tax Rules for Stock Options, Deferred and Equity Compensation, Golden Parachutes, and More
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TUESDAY, APRIL 22, 2014
Presenting a live 90-minute webinar with interactive Q&A
David A. Calder, Morgan Lewis & Bockius, Irvine, Calif.
Gina L. Lauriero, Morgan Lewis & Bockius, New York
Mims Maynard Zabriskie, Partner, Morgan Lewis & Bockius, Philadelphia
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webinar
Executive Compensation Tax Issues in
Mergers and Acquisitions
Mims Maynard Zabriskie
David A. Calder
Gina L. Lauriero
April 22, 2014
www.morganlewis.com
© Morgan, Lewis & Bockius LLP
Executive Compensation Tax Issues in
Mergers and Acquisitions
• Introduction
• Planning for a change in control:
• Rationale for change in control arrangements
• Overview of potential issues
• Say on golden parachute pay
• Closing the deal:
• Deal structure
• Overview of issues
• Treatment of equity compensation
• Severance arrangements and other sources of potential unfunded liabilities
• Internal Revenue Code Section 409A
• Internal Revenue Code Section 280G
• Q&A
6
© Morgan, Lewis & Bockius LLP
Executive Compensation Tax Issues in
Mergers and Acquisitions
Planning for a Change in Control
7
© Morgan, Lewis & Bockius LLP
Purpose of Change in Control Provisions in
Employment Agreements and Change in
Control Agreements
• Goal is to balance the legitimate interests of both the
executive and the employer
• Executive needs to be sure that there is some level of
protection against a successor employer terminating the
relationship or otherwise materially changing the business
deal
• Employer needs to be sure that the change in control
provisions don’t negatively impact its ability to effectuate a
change in control at an appropriate price
8
© Morgan, Lewis & Bockius LLP
Change in Control Provisions in
Employment Agreements and Change in
Control Agreements
• Companies will often provide enhanced severance
protection if a termination occurs upon or within one to two
years after a change in control
• Severance multiple is often greater (e.g., two times
compensation vs. one times compensation)
• Severance otherwise paid in installments is often paid in a
lump sum
• All or a portion of outstanding equity awards vest
9
© Morgan, Lewis & Bockius LLP
Reasons Companies Are Willing to Provide
Change in Control Protection
• Benefits to the employer:
• Helps attract and retain qualified personnel
• Need to provide retention protection if the employer is a possible
target company in a consolidating industry
• Change in control protection makes top management members
neutral regarding acquisition offers and allows them to focus on
the successful completion of the transaction
• Encourages key personnel to continue in employment through
completion of a change in control
• Maximizes shareholder value by retaining key “transition”
personnel
• Protects the company in the event the transaction is not
completed
10
© Morgan, Lewis & Bockius LLP
Employer Concerns in Providing
Change in Control Protection
• Need to balance employer concerns:
• If the employer needs to deliver an intact management
team, change in control terms should not give executives
the incentive to leave upon closing
• Making executives too wealthy may reduce motivation after
the closing
• Shareholder concerns
• Public companies will need to disclose arrangements in their
annual proxy statements
11
© Morgan, Lewis & Bockius LLP 12
Arrangements Addressing
Change in Control Benefits
• Severance Plans and Agreements
• Enhanced severance
• Bonus Plans
• Accelerated vesting or payout
• Deferred Compensation Plans
• Accelerated vesting or payout
• Additional service credit under executive retirement plans
• Equity Compensation Plans
• Single-trigger or double-trigger vesting
• Assumption or cash-out of equity awards
© Morgan, Lewis & Bockius LLP
Triggering Events
• Single-Trigger
• Equity vesting upon the occurrence of the change in
control
• Executive has the right to voluntarily quit on or following
the change in control and receive change in control
benefits
• Double-Trigger
• Executive will only receive change in control benefits upon
a qualifying termination in connection with or within a
specified period following the change in control
13
© Morgan, Lewis & Bockius LLP
Employer-Initiated Termination – “Cause”
• Defining “Cause” is a balancing act
• Executive wants to remove subjectivity to be sure only
specific, objective events are included
• Employer wants to retain subjectivity to allow flexibility in
light of uncertain circumstances
• Notice and cure periods
• Due-process right to Board review
14
© Morgan, Lewis & Bockius LLP
Executive-Initiated Termination –
“Good Reason”
• “Good reason” essentially amounts to constructive
termination without cause, and thus generally results in
the same economics to the executive
• Successor employer should not be permitted to
materially change the initial business deal (e.g., CEO
becomes part of the janitorial staff)
• Notice and cure periods
• Section 409A considerations
15
© Morgan, Lewis & Bockius LLP
Current Trends
• Limited group of executives covered by change in control
arrangements
• Lower severance multiples
• Trending away from three times multiple
• Severance multiples of more than three times base salary
plus target/average/last paid bonus are considered a
problematic pay practice by ISS
• Shift to double-trigger
16
© Morgan, Lewis & Bockius LLP
Current Trends
• Elimination of 280G gross-ups
• Addition of 280G “best net” provisions
• Clawbacks
• Impact of say on golden parachute payments
17
© Morgan, Lewis & Bockius LLP
Disclosure of Change in Control Obligations
• Proxy/CD&A Disclosure
• Must describe severance and change in control benefits
• Must calculate value of benefits
• Must quantify any gross-ups on excess parachute
payments (280G)
18
© Morgan, Lewis & Bockius LLP 19
Shareholder Vote on
Golden Parachute Arrangements
• “Say on golden parachute” provisions apply where:
• Seeking shareholder approval of an acquisition, merger, consolidation, or proposed sale or disposition of all or substantially all of a public company’s assets
• Disclosure also required in connection with going-private transactions and third-party tender offers
• Requirements:
• Disclosure
• Non-binding shareholder advisory vote
© Morgan, Lewis & Bockius LLP 20
Shareholder Vote on Golden Parachute
Arrangements
• Disclosure requirements:
• Disclosure must be in a “clear and simple form in accordance
with the regulations” and must include “the aggregate total of
all such compensation that may (and the conditions upon
which it may) be paid or become payable to or on behalf of
[named executive officers].”
• Disclosure of the “golden parachute” arrangements required
for all agreements and understandings that the acquiring and
target companies have with named executive officers of both
companies.
• Rules require a narrative and a table for disclosing “golden
parachute” compensation.
© Morgan, Lewis & Bockius LLP 21
Shareholder Vote on Golden Parachute
Arrangements – Sample Table
Elements that are separately quantified and included in the total are any cash severance payments (e.g., base
salary, bonus, and pro rata non-equity incentive plan compensation payments) (column (b)); the dollar value of
accelerated stock awards, in-the-money option awards for which vesting would be accelerated, and payments
in cancellation of stock and option awards (column (c)); pension and nonqualified deferred compensation
benefit enhancements (column (d)); perquisites and other personal benefits and health and welfare benefits
(column (e)); and tax reimbursements (e.g., Internal Revenue Code Section 280G tax gross-ups) (column (f)).
The “Other” column of the table includes any additional elements of compensation not specifically includable in
the other columns of the table (column (g)) and requires footnote identification of each separate form of
compensation reported. The table requires separate footnote identification of amounts attributable to “single-
trigger” arrangements and amounts attributable to “double-trigger” arrangements, so that shareholders can
readily discern these amounts.
© Morgan, Lewis & Bockius LLP
Shareholder Vote on
Golden Parachute Arrangements
• A separate shareholder advisory vote is not required on
golden parachute compensation if disclosure of that
compensation was included in the executive
compensation disclosure subject to a prior advisory vote
of the shareholders (say on pay)
• Rare that previous say on pay disclosure is sufficient for
this purpose
• Companies are not required to use any specific
language or form resolution for the say on golden
parachute vote
22
© Morgan, Lewis & Bockius LLP
Shareholder Vote on
Golden Parachute Arrangements
• Say on golden parachute vote only needs to address
arrangements between the soliciting target company and
the named executive officers of the target and acquiring
companies
23
© Morgan, Lewis & Bockius LLP
Executive Compensation Tax Issues in
Mergers and Acquisitions
Closing the Deal
24
© Morgan, Lewis & Bockius LLP 25
The Deal Structure and Players
• What type of transaction?
• Stock purchase/merger (buyer gets everything)
• Asset deal (buyer can pick and choose)
• Public company deal
• Private company deal
• Considerations will vary for sell-side vs. buy-side vs.
management
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure
• What does the plan require?
• Single-trigger or double-trigger vesting
• Consider treatment of performance-vested awards
• What does the plan permit?
• Unilateral right to cancel and terminate
• Ability to cancel underwater options
• Consent requirements; timing issues if notice is required
26
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure
• What are the deal terms regarding equity awards?
• What are the business risks?
• Lillis v. AT&T Corp.: officers and directors whose
underwater options were canceled without consideration in
a cash acquisition argued that the acquiring corporation
should have provided cash consideration based on the
Black-Scholes value of the canceled options
27
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure –
Assumption of Grants
• Options remain in place, but the underlying shares and
the exercise price are adjusted to reflect the transaction
• The buyer’s shares are used upon the exercise of the
assumed options but do not count against the buyer’s
plan reserve
• May require Form S-8 registration for shares issuable
under assumed options
28
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure – Substitution
• The old option is cancelled and a new option is issued
under the buyer’s plan
• The number of shares and exercise price in effect under
the new option are based on the number of shares and
exercise price in effect under the old option, and
adjusted to reflect the transaction
29
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure – Substitution
• The buyer’s shares are used upon option exercises and
may be charged against the buyer’s plan
• May require Form S-8 registration for shares issuable
under substituted options
30
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure – Adjustment
• Assumption or substitution of incentive stock options
must comply with Section 424 regulations
• Assumption or substitution of nonqualified stock options
must comply with Section 409A regulations, which refer
to certain regulations under Section 424
31
© Morgan, Lewis & Bockius LLP 32
Equity Plan/Award Structure – Adjustment
• IRC Section 424 Principles
• Aggregate Spread Test:
• The excess of the aggregate fair market value of the shares
subject to the new or assumed option immediately after the
transaction over the aggregate exercise price must not
exceed the excess of the fair market value of the shares
subject to the old option immediately before the transaction
over the aggregate exercise price
© Morgan, Lewis & Bockius LLP 33
Equity Plan/Award Structure – Adjustment
• Example: Old option for 100 shares with $10 per share
exercise price. At time of acquisition, target’s stock is
worth $20 per share = $1,000 spread. If fair market value
of acquirer’s stock is $40 per share at time of acquisition,
adjusted option will be for 50 shares of acquirer’s stock
with exercise price of $20 per share = $1,000 spread.
© Morgan, Lewis & Bockius LLP 34
Equity Plan/Award Structure – Adjustment
• IRC Section 424 Principles
• Exercise price to fair market value ratio:
• On a share-by-share basis, the ratio of the exercise price to the fair market value of the shares subject to the new or assumed option immediately after the transaction is not more favorable than the ratio of the exercise price to the fair market value of the shares subject to the old option immediately before the transaction
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure – Adjustment
• Example: Old option for 100 shares with $10 per share exercise price and $20 per share fair market value at time of transaction yields 1:2 ratio.
• If fair market value of acquirer’s stock at time of transaction is $40 per share, then option for 50 shares with $20 exercise price per share also satisfies ratio test: $20 to $40 yields 1:2 ratio
35
© Morgan, Lewis & Bockius LLP 36
Equity Plan/Award Structure – Adjustment
• IRC Section 424 Principles
• No new benefits:
• The new or assumed option must not give the optionee
additional benefits
– Vesting acceleration is permissible
© Morgan, Lewis & Bockius LLP 37
Equity Plan/Award Structure – Adjustment
• IRC Section 424/409A Principles
• Determination of fair market value:
• Any reasonable method of valuation may be used to
determine the fair market value of the shares subject to the
option immediately before the assumption or substitution and
the fair market value of the shares immediately after the
assumption or substitution
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure – Adjustment
• Determination of fair market value:
• For an arm’s-length transaction, the fair market value of the
stock subject to the option before and after the assumption or
substitution may be based upon the values assigned to the
stock for purposes of the transaction
38
© Morgan, Lewis & Bockius LLP
Equity Plan/Award Structure – Cash-Out
• Cash-Out of Options
• Seller stock option is cancelled for a payment made in
cash or stock of the acquirer
• Amount of the cash-out is typically equal to the intrinsic
value (“spread”) of the option at the closing of the
transaction
39
© Morgan, Lewis & Bockius LLP 40
Equity Plan/Award Structure – Cash-Out
• Issues relating to cash-out of options
• Loss of ISO status
• Cash-out is taxed as ordinary income
• Cash-out of ISO = withholding taxes and employment taxes
• Disqualifying disposition of ISO shares = no withholding
taxes and no employment taxes
• Underwater options: make sure the plan allows for the
cash-out without having to pay consideration
© Morgan, Lewis & Bockius LLP
Potential Severance Obligations
• Stock Deal:
• Buyer assumes liability for existing arrangements
• Consider whether any severance or change in control plans
prohibit amendment for a specified period following a change
in control
• Determine potential liability under:
• Offer letters and employment agreements
• Severance plans and agreements
• Change in control plans and agreements
41
© Morgan, Lewis & Bockius LLP
Potential Severance Obligations
• Asset Deal:
• Transferred employees will experience termination of
employment, absent special provisions in plans and
agreements
• Consider whether the transaction triggers severance pay
42
© Morgan, Lewis & Bockius LLP
Additional Unfunded Liabilities
• Types of Liabilities:
• Supplemental executive retirement plans; excess plans
• Incentive plans (annual or long-term)
• Other nonqualified deferred compensation plans
• Payment Triggers
• Does the plan or agreement provide for payment (or
funding) upon a change in control?
• Is the payment hardwired into the deal document?
43
© Morgan, Lewis & Bockius LLP
Additional Unfunded Liabilities
• Which party will be obligated to pay:
• Nonqualified plans/SERPs
• Buyer assumes plans and all liabilities (or just those with
respect to transferring employees)
• Buyer establishes mirror plans
• In an asset deal, transferring employees will have termination
of employment triggering payment upon termination, unless
terms provide otherwise
44
© Morgan, Lewis & Bockius LLP
Additional Unfunded Liabilities
• Which party will be obligated to pay:
• Incentive plans
• Seller pays pro rata bonuses (employees may or may not
then be eligible to participate in buyer’s incentive plans)
• Buyer pays bonuses for full year (may be problematic if
bonuses are based on seller’s performance)
• Retention concerns
45
© Morgan, Lewis & Bockius LLP
Section 409A – Compliance of Existing
Arrangements
• Frequently encounter a lack of compliance – especially
private companies
• Requires careful and creative planning when considering
potential acquisitions
• Must lay out business deal risks for acquirer (employee
penalty tax, reporting and withholding obligations,
potential gross-up)
46
© Morgan, Lewis & Bockius LLP
Section 409A – Compliance of Existing
Arrangements
• Individuals in noncompliant plans are subject to tax at
the time of vesting, plus (i) an additional 20% federal
income tax and (ii) interest at the underpayment rate
plus 1%
• California taxpayers are also subject to an additional 5%
state income tax
• Employer has tax reporting and withholding obligations
and may incur penalties if it does not properly report and
withhold
47
© Morgan, Lewis & Bockius LLP
Section 409A – Compliance of Existing
Arrangements
• Equity plans
• Fair market value documentation for stock right grants is
key in private company transactions (especially if stock
rights will be assumed)
• Stock rights are options and stock appreciation rights
• Stock rights must be granted on “service recipient stock”
• Common stock of the company that employs the grantee or a
parent company
• RSUs must have Section 409A-compliant payment terms,
or must meet an exemption from Section 409A
48
© Morgan, Lewis & Bockius LLP
Section 409A – Compliance of Existing
Arrangements
• Change in control provisions
• Does the time or form of payment vary after a change in
control?
• Is the change in control definition compliant with Section
409A?
• Can equity grants or other arrangements be
terminated/cashed out under Section 409A?
• Substitution issues
49
© Morgan, Lewis & Bockius LLP
Section 409A – Compliance of Existing
Arrangements
• Severance Plan/Employment Agreement
• Review payment provisions
• Look out for differing forms of payment (installments before
change in control and lump sum after change in control)
• Good Reason trigger
• Look out for “weak” Good Reason definitions and walk rights
• Six-month delay for “specified employees” in public
companies
• Release timing issues
50
© Morgan, Lewis & Bockius LLP 51
Section 409A – Extension of Vesting
• Extension of vesting of awards or other compensation
that otherwise would vest on the change in control:
• Extended vesting condition must constitute a substantial
risk of forfeiture
• Extension must occur before and in connection with the
change in control
© Morgan, Lewis & Bockius LLP 52
Section 409A – Amounts Payable on a
Change in Control
• Amounts subject to Section 409A can only be paid on a change in control if the change in control meets the requirements of a 409A-compliant change in control
• Keys off of employer (or payor) corporation or any corporation up the chain, linked by majority ownership – note distinction from Section 280G, which looks to the controlled group in determining whether a change in control has occurred
• Change in ownership – acquisition of more than 50%
• Change in effective control – acquisition of 30% or more or turnover of a majority of the board of directors within 12 months
• Change in ownership of a substantial portion of assets – more than 40% within 12 months
• Note that spinoffs and IPOs typically do not satisfy the requirements for a change in control
© Morgan, Lewis & Bockius LLP 53
Section 409A – Separation from Service
• Separation from Service:
• Generally requires substantial, permanent reduction in
service level with direct employer and its controlled group
• In stock sale, there is continuity of employment with direct
employer, and generally no separation from service (even
though there may be a change in control)
• In asset sale transactions, default is that there would be a
separation from service for transferring employees
• Parties may agree to not treat as separation from service, but
must be consistent
© Morgan, Lewis & Bockius LLP 54
Section 409A – Amounts Subject to Earn-Out
• Earn-out Consideration
• Earn-out consideration will be subject to Section 409A if not payable within the short-term deferral period
• Short-term deferral period is generally payment within 2-1/2 months after the year in which the compensation vests
© Morgan, Lewis & Bockius LLP
Section 409A – Amounts Subject to Earn-Out
• Earn-out will satisfy Section 409A if:
• Earn-out must be paid on the same schedule and under the same terms and conditions as apply to the shareholder payments, and must be paid within 5 years after the change in control
• Earn-out constitutes a substantial risk of forfeiture and is payable upon the same terms and conditions as apply to the payments made to the shareholders
– in such event the legally binding right to the earn-out is treated for purposes of the short-term deferral exception as arising on the date it became subject to the substantial risk of forfeiture
55
© Morgan, Lewis & Bockius LLP
Section 409A – Plan Termination
• Change in control plan termination
• Regulations provide special opportunities to terminate Section
409A arrangements pursuant to a change in control
• Must terminate all plans of the same type for all participants
experiencing a change in control
• Note plan aggregation categories
• Termination must occur within 30 days before or within 12
months following a change in control
• All payments must be made within 12 months following the date
of the action to terminate
56
© Morgan, Lewis & Bockius LLP
The “Golden-Parachute” Tax
• 20% excise tax on the employee/independent contractor
• Loss of tax deduction to employer
• Imposed by IRC Sections 280G and 4999 on “excess
parachute payments”
57
© Morgan, Lewis & Bockius LLP
The “Golden-Parachute” Tax
• Parachute payments:
• Payments “in the nature of compensation”
• Made to certain “disqualified individuals”
• Company service provider who is an officer, 1% or more
shareholder, or “highly compensated employee” (highest-
paid 1%, not to exceed 250 employees)
• “Contingent” on a “change in control” (i.e., change in the
ownership or control of a corporation or in the ownership of
a substantial portion of its assets)
58
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax –
Calculation of the Excise Tax
• If an executive receives parachute payments on a
change in control that equal or exceed three times the
executive’s “base amount,” then
• A 20% excise tax on all amounts in excess of one times
the executive’s “base amount,” except to the extent those
payments represent reasonable compensation
• Base amount is the executive’s average annual
W-2 compensation for the most recent five calendar years
(or period worked, if less) ending before the change in
control
59
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax –
Impact of the Excise Tax
• Executives care because they could owe a 20% excise
tax
• Corporations care because parachute payments are not
deductible, and corporations are required to report
parachute payments on Form W-2 and withhold taxes
correctly
• If a corporation fails to withhold and an executive does
not pay, the government may try to collect the tax from
the corporation
60
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – Exemptions
• Payments made by a tax-exempt entity, partnership, or corporation that satisfy most of the requirements to be a small business corporation (commonly referred to as an “S corporation”)
61
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – Exemptions
• Payments made by privately held companies when shareholder approval requirements are met
• Payments must be approved by more than 75% of the disinterested shareholders entitled to vote immediately before the change in control
• “Adequate disclosure” of all material facts regarding all material payments that otherwise would be parachute payments is provided to ALL persons entitled to vote
• Payments must be contingent on the vote
62
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax –
Contingent on a Change in Control
• When is a payment “contingent on a change in control”?
• Payment would not have been made absent the change in
control
• If it is substantially certain at the time of the change in
control that a payment would be made regardless of
whether a change in control occurs, it is not contingent on
a change in control
• A payment made as a result of an event that occurs within
one year of a change in control is presumed to be
contingent on a change in control, but the presumption is
rebuttable
63
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – Transactions
That Trigger Parachute Payments
• What is a change in control under Section 280G?
• Change in the ownership of a corporation
• Acquisition of more than 50% of the vote or value
• Change in the effective control of a corporation
• Presumption upon acquisition of more than 20% of the voting power
or replacement of a majority of directors during a 12-month period,
which presumption may be rebutted
• Transfer of a substantial portion of assets
• Assets with a value of at least one-third of the value of all assets,
determined without regard to any liabilities
• Determined on a controlled group basis
64
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax –
Parachute Payments
• What is a parachute payment?
• Payment in the nature of compensation, such as
• Transaction bonus
• Cash severance
• Continued health and welfare benefits
• Outplacement services
• Option and restricted stock vesting
• Accelerated payment of deferred compensation
65
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax –
Excess Parachute Payments
• Special valuation rules under the 280G regulations can
minimize the amount included as a parachute payment
• The portion of a parachute payment that exceeds the
base amount allocated to it is referred to as an “excess
parachute payment”
• The base amount is allocated pro rata among all the
actual parachute payments
66
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – “Reasonable
Compensation” Before a Change in Control
• If the portion of a parachute payment that can be justified
as reasonable compensation for services rendered
before a change in control exceeds the base amount
allocated to that parachute payment, the excess amount
also will be subtracted from the excess parachute
payment.
67
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – “Reasonable
Compensation” After a Change in Control
• If compensation is reasonable in amount for services to be rendered after the change in control, such amount is subtracted from the payments (i.e., essentially treated as an exempt payment) for all purposes of Section 280G
• Payments may only be made for the period the individual actually performs services
• If duties don’t substantially change, compensation should not be significantly greater than it was prior to the change in control
• If duties substantially change, compensation should not be significantly greater than that paid in the market
68
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – “Reasonable
Compensation” After a Change in Control
• Restrictive covenants
• Compensation paid for a noncompete covenant may be
considered reasonable compensation for services
rendered after a change in control
• Enforceability of a noncompete covenant is required
• The IRS has opposed excessive values attributable to
reasonable compensation, especially where noncompetes
are adopted shortly before a change in control
69
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – Strategies to
Avoid Excise Taxes
• “Gross-up” provision for excise taxes
• Most companies no longer provide gross-ups
• “Best-net” provision for parachute payments
• Reduce payments to avoid excise tax if it puts an
executive in a better net-tax position
• If paying excess parachute payments is better for the
executive, the company loses the deduction
• Parachute cap
70
© Morgan, Lewis & Bockius LLP
The Golden Parachute Tax – Strategies to
Avoid Excise Taxes
• Increase the executive’s “base amount”
• Attach a valid, enforceable noncompete to parachute
payments (but note the audit risk previously discussed)
• Waiver and shareholder approval for private company
71
© Morgan, Lewis & Bockius LLP
Presenters
• Mims Maynard Zabriskie
• mzabriskie@morganlewis.com
• David Calder
• dcalder@morganlewis.com
• Gina Lauriero
• glauriero@morganlewis.com
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