Publicly Held Companies |
Topic | Summary | Notes |
General Rule | - Companies with class of securities required to be registered under Section 12 of ’34 Act
- Companies required to file reports under Section 15(d) of ’34 Act
- Must be required to register/file reports at year-end to be covered
| - Generally, covers companies on national stock exchanges and those that offer to sell their securities under ’33 Act
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Publicly Traded Subsidiaries | - Considered a separate entity for purposes of rule
- Example: Subsidiary with public debt
| - Results in multiple groups of covered employees – each entity evaluated independently
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Foreign Private Issuers | - Generally, foreign issuer with (i) more than 50 percent of voting stock held by U.S. residents and (ii) either a majority of officers and directors citizens/residents, more than 50 % percent of assets located in U.S. or business is principally located in U.S.
| - Expands coverage of rule to firms that do not file traditional SEC executive compensation disclosures
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Publicly Traded Partnerships (PTPs) | - Partnerships may issue equity interests registered under Section 12 of ’34 Act
- Example: Master Limited Partnerships (MLP) common to energy sector
| - PTPs treated as corporations covered by rule
- PTPs exempt from corporate status not covered by rule
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Affiliated Groups | - Affiliated Corporations under IRC 1504 considered part of publicly held company
- Generally covers parent-subsidiary groups with stock ownership of 80 percent voting power and 80 percent value of assets
| - Private parent companies with public subsidiaries covered by rule
- Also covers foreign subsidiaries
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Disregarded Entities | - Entities owned by a single owner considered disregarded for tax purposes
- DEs may issue registered securities or file reports
| - Corporations that own DEs treated as issuing securities issued by DE and covered by rule
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Q-Subs | - Generally, S corporations that are wholly-owned by another S corporation
- Q-Subs may issue registered securities or file reports
| - Owner of Q-Sub that issue registered securities or that file reports covered by rule
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Covered Employees |
General Rule | - CEO & CFO at any time during tax year
- Three highest executive officers required to be reported in proxy
- Was a covered employee in prior years
- Any officer whose compensation was among three highest, even if not required to be reported in proxy
| - Eliminates requirement that executive be employed at year-end to be covered
- Proposed rules generally follow 2018 Notice
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Incongruent Tax v. Fiscal Year | - SEC disclosure rules based on fiscal year; usually matches tax year, but not always
| - Compensation measured based on tax year as the fiscal year
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Executive Officers Only | - SEC disclosure rules only apply to executive officers
| - Only executive officers covered by 162(m)
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Separation from Service | - Once a covered employee, always a covered employee
| - Post-employment compensation covered by rule
- Ex. Executive retirement payments
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Predecessor Companies | - Companies that go private and then become public again within 36 months or private transaction
- Public companies acquired by stock, asset, reorganizations or divisions
| - Covered employee including covered employees of “predecessor” firms
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Disregarded Entities | - Executive officers of DEs may be considered executive officers of publicly held parent
| - Evaluated based on policy making function with regard to parent
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Q-Subs | - Executive officers of Q-Subs may be considered executive officers of publicly held parent
| - Evaluated based on policy making function with regard to parent
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Grandfathering |
General Rule | - Compensation paid pursuant to a written binding contract in effect on Nov. 2, 2017 eligible for grandfathering unless materially modified
- Reject proposed safe-harbor for amounts accrued under GAAP
| - Binding contract status determined according to state law
- Treasury requests comments regarding other potential safe-harbor standard
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Negative Discretion | - Regulations suggest that compensation only grandfathered to extent negative discretion limited to “floor”
- Ex. Compensation may not be reduced to less than $x
| - Relief also provided to the extent that state law may limit negative discretion
- State law standard is ambiguous – presumably “bad faith” reductions prohibited
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Clawbacks | - Compensation subject to mandatory clawback does not eliminate grandfathering for compensation retained
- Discretionary clawback right limits grandfathering to amounts company entitled to recover under state law and past practice
| - State law and past practice is ambiguous – presumably “excessive” clawbacks prohibited
- If “bad behavior” does not occur, disregard discretionary clawback authority
- If “bad behavior” occurs look to state law and past practice to determine grandfathered amount
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Defined Benefit Plans | - Amount accrued as of Nov. 2, 2017 grandfathered
- Subsequent earnings only grandfathered if company obligated to pay under the plan as in effect Nov. 2, 2017
- Subsequent increases attributable to pay increased/years of service accruals not grandfathered
| - Earnings paid during 12 months post termination and prior to payout eligible for grandfathering
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Severance | - May qualify for grandfathering if based on compensation elements (base/bonus/etc.) company obligated to pay per contract
- Grandfathered amount measured as of Nov. 2, 2017
| - Each component of severance analyzed independently
- Ex. Multiple of base grandfathered/multiple of discretionary bonus not grandfathered
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Loss of Grandfathering | - Grandfathering lost if contract materially modified after Nov. 2, 2017
- Material modification generally = increase in/acceleration of compensation payable
| - Grandfathering lost only with regard to amounts paid post material modification
- Modification of one contract ≠ modification of other contracts unless pay under others increased as result
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Supplemental Agreements | - Treated as materially modifying grandfathered arrangement if additional compensation paid on substantially same elements/conditions
- Additional equity grants ≠ supplemental agreement to base salary
| - Reasonable COLAs ≠ material modification
- Increases in excess of COLAs = material modification
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Accelerated Vesting | - Permitted without loss of grandfathering for options, SARs and restricted stock
- Permitted for cash-based awards
| - Unexpected positive news for employers, though shareholder pressure may limit application
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Earnings | - Grandfathered if based on pre-determined investment and amounts deferred as of Nov. 2, 2017
| - Examples suggest choice between investments permitted
- Change in investment line-up may eliminate grandfathering
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Contract Extensions | - Company discretion to terminate results in loss of grandfathering as of first date contract may be terminated
- Executive right to extend does not eliminate grandfathering
| - Ex. Employment term auto renewals unless either party provides notice of non-renewal = new contract as of renewal date
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Right to Future Plan Participation | - Amounts payable under plan executive had a contractual right to participate in as of Nov. 2, 2017 eligible for grandfathering
| - Applicable even if participation does not begin until after Nov. 2, 2017
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Accelerating Payment Timing | - Acceleration = material modification unless amount discounted for time value of money
| - Ability to accelerate payments limited due to IRC 409A
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Deferring Grandfathered Payments | - May defer amounts owed under grandfathered contracts without losing grandfathering on principal deferred
| - Earnings on post-Nov. 2, 2017 deferrals not eligible for grandfathering
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COLAs | - COLA adjustments do not eliminate grandfathering for amounts paid pursuant to contracts in effect on or before Nov. 2, 2017
| - Oddly, the actual amount of the COLA is subject to new rules
- Ex. $2M base salary + $40K COLA / base remains grandfathered, COLA included under new rules
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Covered Compensation, Newly Public Companies & Effective Dates |
Covered Compensation | - Generally, all compensation paid to a covered employee that is deductible (without regarding to 162(m) limits)
- Includes amounts paid to beneficiaries upon death
Partnership Income - Compensation paid by a publicly held company’s partner to which a portion is allocated to the public company covered by rule
Director/Other Fees - Covered by rule and aggregated with compensation for services as an employee
| - Expansive definition that follows tax rules for includible compensation
- Partnership income often the result of joint ventures
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Newly Public Companies | - Transition relief formerly available for newly public companies (IPOs, spin-offs, etc.)
| - Proposed regulations do not provide any transition relief for newly public companies
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Effective Dates | - Generally applicable to tax years beginning on or after date of publication of Final Rule in Federal Register
- Covered Employees – effective for tax years ending on or after Sept. 10, 2018
- Predecessor Company – effective for companies that go private for tax years beginning after Dec. 31, 2017 and becomes public again on or after date of publication of Final Rule in Federal Register
| - Compensation – Rules re: partnership applies to compensation allowable for tax years ending on or after date of publication of Proposed Rule in Federal Register
- Newly Public Companies – elimination of transition relief only applicable to companies that become public on or after date of publication of Proposed Rule in Federal Register
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