The final regulations clarify:
1. Maximum Number Of Shares With Respect To Which Options Or Rights May Be Granted To Each Individual Employee
The final regulations confirm that a grant of stock options and stock appreciation rights will qualify as performance-based compensation if, among other requirements, the plan specifies the maximum number of shares to which options and stock appreciation rights may be granted to each covered employee during any specified period, which limit is disclosed to and approved by the corporation’s shareholders. Stating an overall plan limit on the maximum number of shares that may be granted to all plan participants is not sufficient. The final regulations clarify that a plan may satisfy this individual “per-employee” limit by specifying the maximum number of shares to which any type of equity-based compensation may be granted to an individual employee during a specified period (rather than only stock options and stock appreciation rights).
This clarification applies to compensation attributable to stock options and stock appreciation rights that are granted on or after June 24, 2011.
In light of this clarification, public companies should review their equity plan documents to ensure that the “per-employee” maximum share limitation is properly specified.
2. Compensation Payable Under Restricted Stock Units Paid By Companies Than Become Publicly Held
Generally, when a corporation becomes publicly-held, the Code Section 162(m) deduction limitations do not apply to compensation paid pursuant to a plan or agreement that was in place while the corporation was not publicly-held. The corporation may rely on this “newly public exception until the earliest of (the transition period):
The existing regulations provide that this “newly public” exception applies to compensation received pursuant to the exercise of a stock option or stock appreciation right, or the substantial vesting of restricted property, if the grant occurs before the expiration of the transition period. The final regulations clarify that compensation payable under a RSU or phantom stock arrangement is eligible for the “newly public” exception only if it is paid, and not merely granted, before the expiration of the transition period.In rejecting the request made by commenters for RSUs or phantom stock to be able to enjoy the same transition rule as stock options, stock appreciation rights, and restricted property, the Treasury Department and IRS reasoned that, because compensation attributable to a RSU or phantom stock is in the nature of nonqualified deferred compensation that may be subject to Code Section 409A (unlike restricted stock that is governed by Code Section 83), compensation attributable to a RSU or phantom stock is not sufficiently similar to restricted property to receive the transition relief.
The final regulations provide that this clarification concerning RSUs and phantom stock arrangements apply to equity-based awards granted on or after April 1, 2015. Thus, any RSUs and phantom stock arrangements that were granted prior to April 1, 2015 will be eligible for the “newly public” exception even if paid after the corporation’s transition period has expired.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors:
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