Disclosure Rules Applicable to Stock Purchase/Stock Options Granted to

[Guest McElroy]

I received a voice message from a client indicating that the client wanted assistence in preparing required disclosure about stock option or grant in excess of 1,000,000 made to an employee. I've never heard of anything like this. Any thoughts? Thanks. Ed

[Kirk Maldonado]

It is contained in Section 162(m) of the Internal Revenue Code. Be sure to read the regulations, that's where all of the detail is located.

[pjkoehler]

McElroy, what you'll find is that Sec. 162(m) denies a deduction to any publicly held corporation for compensation paid to a select group of "covered employees" to the extent that the compensation exceeds $1M in a taxable year, even if the compensation otherwise satisfies the reasonableness standard of section 162. There are certain exceptions, i.e. compensation disregarded for purposes of the $1M cap, including qualified "performance-based compensation." The general requirements are (1) the compensation is paid solely due to attainment of performance goals, (2) the performance goals are established by a compensation committee consisting of 2 or more outside directors, (3) the material terms of the performance goals under which the compensation is paid, including the individuals eligible, the business criteria on which the goals are based and the maximum amount payable, are reasonably disclosed to and approved by the shareholders of a publicly held corporation prior to payment and (4) prior to payment, the compensation committee certifies in writing that the performance goals are met. Treas. Reg. Sec. 1.162-27(e)(1).

Since the value of a compensatory stock options relates solely to the increase in the price of the stock, they are deemed to be performance-based (not subject to the general requirements) if (1) they are awarded by the independent compensation committee, (2) the compensation attributable to the options arises solely due to increase in the value of the stock after the grant date, (3) the stock option plan must state a maximum number of shares with respect to which an option may be awarded, and (4) the plan must be approved by the shareholders of a public corporation. Treas. Reg. 1.162-27(e)(2)(vi)-(vii). Discounted options and resticted stock will not be deemed to be performance-based.

[This message has been edited by PJK (edited 06-22-2000).]