• Performance Vesting - how does one determine if the goals were achieved? on termination of employment, do you pro-rate the period or delay payment and pro-rate the shares
• Clawbacks - what types of compensation are affected and how far back can the clawback reach? who is subject to a clawback?
• Change in Control – what is the effect of a change in control on the awards? what are the special challenges in valuing performance vesting?

For answers to these and other questions, please join us for a workshop, “Equity Compensation Boot Camp: Canada and U.S.” being held in Osler’s New York office on March 20 from 12:00 to 2:30 p.m. For a copy of the invitation and the topics to be discussed click here or please contact Vaughna MacKenzie at seminars@osler.com.

Generally, restricted shares are subject to Section 83, but restricted stock units, deferred stock units and phantom stock, are not.
 

The agenda for the IRS webinar includes:

• Key international strategies and projects of the IRS Employee Plans division
• Compliance coverage in Puerto Rico and the Virgin Islands
• Employee Plans Team Audit with international issues
• EPCU international compliance check projects
• Current retirement plan outreach and guidance efforts
• Special coverage rules and Code Section 415 limits for participants with foreign source income.

Registration is required, using the link above.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) calls for mandatory say-on-pay votes at all annual meetings of U.S. issuers and certain foreign issuers that are subject to the Securities and Exchange Commission’s proxy rules. Shareholders will also vote on whether they want the vote to occur every one, two or three years. Although both of these votes are non-binding advisory votes, companies and shareholders are paying close attention to the results. In addition, the Dodd-Frank Act requires disclosure of golden parachute arrangements and shareholder approval of such arrangements in connection with meetings held under the U.S. proxy rules to approve acquisition transactions.

For more information on these say on pay developments, see the Osler Update: Shareholders Have Their Say: Say on Pay Developments in U.S. and Canada.

Trap 2: Is your valuation date clearly stated? A stock unit plan must identify the date and method to value the stock units in order to pay the unit holder. But what if the units are being paid early due to certain termination events? Or what if payment is delayed due to the six-month delay imposed on “key employees” under Section 409A of the Code? The valuation date for those events should be addressed in the plan text, as well as normal payment timing.

Case in Point: In the first case of its kind to address the 409A delay, a United States federal court in the 11th circuit dismissed a claim by the Company to recoup part of the amounts paid in satisfaction of RSUs to its former CEO after his retirement (Graphic Packaging Holding Co. v. Humphrey, 11th Cir., No. 10-12015, unpublished decision 11/16/10). The payout had been delayed for six-months due to Section 409A restrictions, however, after it paid the executive the Company claimed that it made a mistake in valuing the RSUs as of his retirement date rather than on the payment date (six months after retirement). The stock value dropped significantly during those six-months and the Company sought to recover the overpayment, which was significant: about $542,000.

The plan document did not specify the valuation date; it was silent. And there was no prior experience applying the mandatory six-month delay to show a pattern or practice to demonstrate intent. So the court concluded that Graphic Packaging failed to produce sufficient evidence showing that valuing the RSUs on the date of Humphrey’s retirement was a mistake. This result would have been avoided if the plan had specified the valuation date for the RSUs.

The case serves as a useful reminder that it is not enough to adopt the appropriate amendment to impose a six-month delay required by Section 409A. The amount payable at the end of the delay must also be clear.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act, there are lots of new goodies on the executive compensation front. While most of the new compensation rules would not seem to apply to Canadian issuers (unless they are voluntarily complying with U.S. compensation disclosure rules instead of Canadian rules), they may indeed set a new standard for best practices because U.S. institutional investors will become accustomed to these requirements:

U.S. Case in Point: A federal judge in New York recently denied enhanced retirement benefits to the CFO that would have been due to him under the terms of an amended SERP because the board resolutions from seven years before his retirement seem to have never been finalized. The court ruled against the executive seeking benefits, despite the undisputed facts that the board had agreed “in concept” to the SERP enhancements and that two other executives had been paid out under the amended plan terms. The reason? Under the terms of the SERP, only the Board could amend the plan and the Board never formally approved the amendments.

There is a take-away lesson from story: Always follow corporate formalities through to completion when adopting or changing compensation plans – including signatures and dates with unambiguous approval language. Further, don’t forget to formally delegate authority to officers to finalize or change amendments, whenever delegation is appropriate.

Special thank you to Michael Melbinger for bringing this new case to my attention.

IRS Notice 2010-6, issued January 5, 2010, is long-awaited welcome news for employers who encounter minor documentation errors. It even provides a small amount of relief for plans not meeting even basic rules under Section 409A (e.g., that don’t require payment only upon permissible payment events) by limiting penalties that result from documents with certain impermissible plans terms after corrections are made.

The notice addresses the following written documentation errors, among others:

• failure to include the required six-month delay for specified employees;
• interpretations of ambiguous language for payment timing, such as “as soon as practicable” (which may not be treated as a document failure at all);
• payments conditioned on employment-related actions, such as the execution of a non-competition agreement or a release of claims, which may affect the timing of payment;
• impermissible payment periods, such as “within 180 days following separation from service”; and
• impermissible payment events, such as payment “upon an initial public offering” or impermissible discretion to accelerate the timing of payment.

Some corrections can be made without any penalties, others require payments and tax reporting, but all applicable corrections are subject to reduced penalties. In all cases, eligibility for correction requires satisfaction of additional requirements, including that neither the employer nor individual taxpayer is being audited by the IRS, and that all other substantially similar document failures in other non-qualified deferred compensation plans be corrected at the same time.

The new guidance provides a helpful reminder that it is important to skillfully apply knowledge of Section 409A’s detailed rules when drafting deferred compensation arrangements, and it will also assist employers who acquire non-compliant plans in acquisitions.

• Following instructions from the G-20 summit, the U.S. Federal Reserve has issued proposed guidelines for incentive compensation (PDF). This applies to banking organizations governed by the Fed, including U.S. operations of foreign banks with a branch, agency or commercial lending subsidiary in the U.S. 
• Special Master Kenneth Feinberg released determinations on 2009 compensation packages for top executives at seven firms, including AIG, Citigroup, Bank of America, Chrysler and Chrysler Financial, that received exceptional governmental assistance from the U.S. government.  As you have no doubt read in the media, he rejected proposals that he thought provided too much cash and he forced executives to take payments in company stock that must be held over the long term.

Even though many employers are not directly affected by these pronouncements, both of these developments will no doubt be of interest to Canadian financial institutions, as well as public companies more generally. In particular, companies that are seeking a framework for analyzing the link between compensation and risk-taking will be studying the principles applied in these announcements:

• Balanced Risk Taking: Sound incentive compensation plans should reward appropriate risk, not excessive risk. Examples of features to make compensation more sensitive to risk are: deferral of payment (and “clawbacks”), longer performance periods, and risk adjustment of awards (i.e., communicate to employees the ways in which awards will be reduced as risk increases).
• Risk Management and Effective Controls: Institute appropriate controls to maintain the integrity of risk management functions; revise arrangements as needed if payments do not appropriately reflect risk.
• Strong Corporate Governance: Provide resources to the board of directors so that it can actively oversee incentive compensation and follow a systematic approach to balanced compensation design.

Among other things, these limitations restrict the amount of compensation that can be contributed to a defined contribution plan, or the amount that can be considered when calculating defined benefit accruals in a qualified retirement plan.