Executive Compensation Tax Issues in M&A: Navigating IRS Rules - PowerPoint PPT Presentation

Presenting a live 90-minute webinar with interactive Q&A Executive Compensation Tax Issues in M&A: Navigating IRS Rules for Stock Options, Deferred and Equity Comp, Golden Parachutes THURSDAY, JULY 6, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Erica Schohn, Partner, Skadden Arps Slate Meagher & Flom , New York Gavin A. White, Partner, Skadden Arps Slate Meagher & Flom , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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EXECUTIVE COMPENSATION, EMPLOYEE BENEFITS AND TAX ISSUES IN CORPORATE M&A TRANSACTIONS Presented by Gavin White Erica Schohn Skadden, Arps, Slate, Skadden, Arps, Slate, Meagher & Flom LLP, Meagher & Flom LLP, New York New York

M&A TIMELINE 1. Pre-Signing 2. Post-Signing/Pre-Closing 3. Closing 4. Post-Closing 6

1. PRE-SIGNING 7

1. PRE-SIGNING A. Structuring the Deal B. Conducting Diligence C. Negotiating the Transaction Document D. Considering Retention/Employment Arrangements 8

A. Structuring the Deal 9

1. PRE-SIGNING A. Structuring the Deal  Transaction generally may be structured as a stock purchase/reverse subsidiary merger or asset acquisition and may be taxable or tax-free  Treatment of target’s outstanding equity awards  In stock acquisitions, outstanding equity awards are usually assumed/substituted; more rarely, cashed out and canceled  In an asset transaction, outstanding awards generally remain subject to the seller’s equity plan, and there is a termination of employment of seller’s employees for purposes of equity plan  Employees generally are given a specified period post-closing in which to exercise stock options; other awards generally terminate upon the termination of the employees’ employment at the closing of the transaction. 10

1. PRE-SIGNING A. Structuring the Deal  The most common types of awards that may be outstanding at target include:  Stock options: A right to purchase shares of company stock at a specified price, generally referred to as the “exercise price”  Stock appreciation rights (SARs): A right to receive a cash payment based on the excess, if any, of the value of company common stock on the exercise date over the value of the stock on the grant date  Restricted stock: Grant of shares of company stock subject to vesting restrictions  Restricted stock units (RSUs): The right to receive a share of stock (or cash value of a share of stock) upon vesting or a later date 11

1. PRE-SIGNING A. Structuring the Deal: Treatment of Equity Awards Considerations for determining treatment of equity awards:  business decisions/use of cash  dilution of acquiror’s shareholders  prevalence of out-of-the-money options  ability to achieve retention benefits through continuation of awards  terms of the applicable equity compensation plans  legal compliance issues raised in diligence  legal limitations (e.g., consent requirements, substitution limitations)  Section 280G golden parachutes and potential gross-ups  administrative burden considerations: equity tracking, employee communications, accounting, SEC registration  international compliance 12

1. PRE-SIGNING A. Structuring the Deal: Treatment of Equity Awards  Determine type and scope of outstanding equity awards; identify key holders and terms of outstanding grants (e.g., vested versus unvested)  Determine whether the underlying equity plan permits or frustrates the proposed treatment of outstanding awards  Assumption or substitution of equity awards permitted?  Cash out of outstanding awards permitted?  Acceleration required?  Ability to cancel awards without consent, particularly out-of-the-money options?  Notice requirements and/or ability of option holders to exercise?  If the desired treatment is not permitted under the terms of the equity plan, the target may need to obtain consents from award holders prior to the closing 13

1. PRE-SIGNING A. Structuring the Deal: Treatment of Equity Awards  Determine whether treatment of equity awards should vary by type of equity award, holder or based on vested status or exercise price (compared to per share price applicable in the transaction)  Should options, SARs, restricted stock and RSUs be treated differently (e.g., one or more types of the target’s outstanding equity awards may be inconsistent with acquiror’s employee equity program)?  Should employee-held equity awards be treated differently from awards held by non-employee directors/consultants?  Should certain key employee equity awards be treated differently than equity awards held by employees generally? Does the plan allow for such disparate treatment?  Should vested and unvested stock options be treated differently?  If permitted by the terms of the applicable target plan, should in-the-money stock options be treated differently from out-of-the-money options? 14

1. PRE-SIGNING A. Structuring the Deal: Equity/409A Considerations  Review of Section 409A  Section 409A of the Internal Revenue Code governs the timing of elections to defer compensation, the timing of distributions of deferred compensation and the reporting and taxation of deferred compensation.  Amounts are generally considered to be deferred if an individual obtains a legally binding right in one tax year to receive compensation in a later tax year.  A violation of Section 409A may result in immediate inclusion in income of the vested deferred amounts and penalty taxes and interest to the employee and may also result in penalties for reporting and withholding violations by the service recipient company. 15

1. PRE-SIGNING A. Structuring the Deal: Equity/409A Considerations  Cash out of options and SARs generally do not violate Section 409A  Canceling stock options and SARs in exchange for an immediate cash payment that is equal to the excess of the per share transaction price over the applicable exercise price should not violate Section 409A  Earnouts and escrows should be structured to comply with Section 409A  Section 409A provides an exemption for “earnout” payments or payments otherwise held back from payment upon closing, so long as the earn-out is paid on the same schedule and on the same terms and conditions as payments are made to target shareholders generally and the amount is paid out fully within five years after the change of control  Practitioners take view that cashing out out-of-the-money stock options for a specified price is also permitted under the rules of Section 409A  Cashing out unvested options and paying proceeds out over time (e.g., in accordance with the original vesting schedule) raises issues under Section 409A. Converting options into restricted stock units likewise raises issues under Section 409A 16