January 17, 2012
A Section 162(m) “Heads Up” for this Proxy Season
– Mark Poerio, Paul Hastings
As I recently blogged, higher-than-usual stakes attach this year to proposals for shareholder approval of new (or amended) cash incentive plans and/or equity award plans. This is mainly because of the two Delaware District Court decisions, which essentially highlight a litigation risk if a proposal for shareholder approval states or implies that awards “will qualify” – rather than “are intended to qualify” – either for exemption from Code §162(m) or as performance-based compensation for Code §162(m) purposes. While Code §162(m) has your attention, two further caveats are worth mentioning.
1. Five-year Rule – Although the normal life of a stock plan is 10 years, an exemption from Code §162(m) requires shareholder approval every 5 years if the plan follows the common practice of merely identifying a maximum per person limit and a menu of possible performance-based measures (as opposed to locking-in a formula for awards).
2. Vesting on Involuntary Termination or Retirement -The Treasury Department has issued a ruling to the effect that a performance-based award will lose its §162(m) exemption to the extent that the award will be paid-out, regardless of performance outcomes after 2008, in connection with the award holder’s termination of employment for a reason other than death or disability.
As a general precaution, public companies should be sure to carefully vet any proxy statement that proposes a compensation-related plan for shareholder approval (whether the plan involves cash or equity awards, or both).