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  1. Bank executives have employment agreements that allow 2 times pay as severance for voluntary separation from service within one year after a Change in Control defined by reference to 409A definition of Change in Control Event. Bank wants to incorporate a Holding Company and do a statutory share exchange where all of the Bank shareholders exchange their Bank common stock shares for Holding Company shares, leaving Holding Company as owner of all shares of Bank common stock, and Holding Company will then have same shareholders that Bank had before the transaction. No Bank shareholder is related by attribution rules of 318(a) to any other Bank shareholder. No Bank shareholder owns more than 30% of the outstanding shares of Bank. Bank has asked if this is a Change in Control Event under 409A, for purposes of the employment agreements of the Bank executives. After this transaction, if one of the Bank Executives leaves voluntarily, would he or she be entitled to the severance pay under his or her employment agreement? I know this shouldn't be a 409A Change in Control Event, as nothing has "really" changed, but I'm having trouble pinning down why in the regs under 1.409A-3(i)(5)(v), (vi) and (vii). Even if the shareholders of Bank are treated as acting as a group, (because they are involved in an acquisition of shares involving the corporation they all own) the Holding Company is a separate "person" and as an entity it does acquire more than 50% of the voting stock of the Bank in the transaction. After the transaction, the 318(a) attribution rules don't help with respect to the original shareholders, with respect to Bank stock or Holding Company stock, as none of them own more than 50% of the Bank stock or the Holding Company Stock before or after the transaction, and the attribution rules of 318(a) measure stock ownership of each shareholder even if they are "persons acting as a group" for other purposes. Also, since the Bank stock will remain outstanding after the transaction, the exclusion from the definition of Change in Control of 'transfers to a related party' of 1.409A-3(i)(5)(vii) respecting Change in Ownership of a Substantial Portion of Assets does not apply the way it might in a merger where the stock of the target does not remain outstanding after the transaction. Can anyone point to the regulation under 1.409A-3(i)5(v), (vi) and/or (viii) that excludes this transaction from the definition of Change in Control Event under 409A?
  2. I'm reviewing a deferred compensation program that has the pay-out based upon the value of the service recipient's stock. There are several 409A permissible payment triggering events (separation from service, disability, change in control). In the payout section, it says that upon a triggering event, 1/3 of the deferred comp will be paid out over each of the next three years. Then, there is a provision that says in the case of a Change in Control, if the terms of the payout for the shareholders under the CIC are more favorable than the standard payout above, then the payout will occur in accordance with the terms applicable to the shareholders in general. 1.409A-3(i)(5)(iv) says: "Payments of compensation related to a change in control event...that occur because...the service recipient or a third party purchases a stock right held by a service provider, or that are calculated by reference to the value of stock of the service recipient (collectively, transaction-based compensation), may be treated as paid at a designated date or pursuant to a payment schedule that complies with the requirements of section 409A if the transaction-based compensation is paid on the same schedule and under the same terms and conditions as apply to payments to shareholders generally with respect to stock of the service recipient pursuant to a change in control event...." I don't see this as an impermissible toggle - there is only one payout schedule in the case of a CIC- in accordance with the terms of the general shareholders agreement if they are more favorable than the standard terms; otherwise the standard terms apply. Does that interpretation seem reasonable, or am I way off base?
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