Portfolio 75-1st: Stock Options and Other Equity-Based Compensation Arrangements

I. Introduction
A. Background
B. Scope of Portfolio

II. Types of Equity-Based Compensation Programs
. Introductory Material
A. Stock Options
1. Nonqualified stock options
2. Incentive stock options
B. Employee Stock Purchase Plans
C. Restricted Stock/Restricted Stock Units
D. Phantom Equity Arrangements
1. Phantom stock
2. Stock appreciation rights
E. Performance Shares/Units

III. Taxation
A. Stock Options
1. Nonqualified stock options—§83
a. Readily ascertainable fair market value
b. Receipt of stock subject to a substantial risk of forfeiture
c. Employer deduction
2. Incentive stock options
a. Requirements for an ISO—§422
(1). Employee status
(2). Option price
(3). Duration of option
(4). Stockholder approval
(5). Stock as option property
(6). Limitations on options to be exercised
(7). Other permitted plan provisions
(8). Modification
b. Tax treatment of employee
(1). In general
(2). Disqualifying dispositions
c. Tax treatment of employer
d. Reporting requirements
3. Discounted stock options
B. Restricted Stock
1. Tax treatment of employee—§83
2. Section 83(b) election
3. Tax treatment of employer
C. Stock Appreciation Rights
1. Tax treatment of employee
2. Tax treatment of employer
D. Phantom Stock
E. Employee Stock Purchase Plans
1. Requirements for qualified ESPP—§423
a. Employee status
b. Stockholder approval
c. Stock as option property
d. All employees must have the same rights and privileges
e. Limitation on yearly grants
f. Exercise price
g. Duration of option
h. Restrictions on transfer
i. Other permitted plan provisions
2. Tax treatment of employee
3. Tax treatment of employer
4. Reporting requirements
F. $1 Million Deduction Limitation—§162(m)
1. Applicable employee remuneration
2. Performance-based compensation
a. Stock options and SARs
b. Restricted stock
3. Publicly-held corporations—IPOs
a. IPOs
b. Subsidiary of a public company
G. Taxation of Nonqualified Deferred Compensation—I.R.C. §409A
1. Background
a. Restrictions on elections and payouts
b. Timing of distributions
c. Non-accelerations; election changes
d. Penalties
e. Effective date
f. Reporting
2. Effect on NQSOs
3. Effect on SARs
4. Effect on restricted stock and restricted stock units
5. Effect on performance shares and units
6. Effect on deferral of stock option gains
H. Employment Tax Withholding Issues
I. Qualified Small Business Stock
J. Source Taxation by States

IV. Corporate Law and Governance Issues
. Introductory Material
A. Statutory Authorization—Overview
B. Directors’ Fiduciary Duty
1. Business judgment rule
a. Duty of care
b. Duty of loyalty
2. Entire fairness test
3. Waste of corporate assets
4. Stockholder ratification
a. Duty of disclosure
b. Effectiveness of stockholder ratification
C. Stockholder Approval Requirements
1. State corporate law
2. Stock exchange and NASD rules
a. New York Stock Exchange
b. American Stock Exchange
c. NASD rules
d. New NYSE and NASDAQ shareholder approval requirements
(1). NYSE rules
(2). NASDAQ rules
3. Tax requirements
a. Statutory stock options—§§422 and 423
b. $1 million compensation deduction—§162(m)

V. Federal and State Securities Laws
. Introductory Material
A. Registration
1. Is there a ‘security'?
2. Is there a ‘sale'?
3. Exemptions from registration
a. Rule 701 exemption
(1). Disclosure requirements
(2). Volume limits
(3). Coverage
(4). Resales
b. Intrastate offering—§3(a)(11) and Rule 147
c. Private offering exemptions—§4(2) and Regulation D
(1). Section 4(2) private placements
(2). Limited offerings under Regulation D
4. Methods of registration
a. Form S-1
b. Form S-8
c. SEC revisions to Form S-8
(1). Transferable options
(2). Consultants
5. Penalties for nonregistration
a. Recision
b. Misleading statements
c. Fraud
d. Civil and criminal liability
6. Anti-fraud provisions
7. Resales by plan participants—Rule 144
B. Short-Swing Profit Liability
1. Background
2. Persons subject to §16
3. Exempt transactions—Rule 16b-3
a. Tax-conditioned plans
b. Discretionary transactions
c. Acquisitions from the issuer—grant or award transactions
(1). Approval by board of directors
(2). Approval or ratification by stockholders
(3). Six-month holding period
d. Dispositions to the issuer
e. Derivative securities
4. Reporting requirements
a. Form 3
b. Form 4
c. Form 5
d. Specific applications
(1). Derivative securities
(2). Transactions under tax-conditioned plans
(3). Post-termination transactions
(4). Removal of transferability restrictions
e. Issuer disclosure requirements
C. Other Exchange Act Requirements
1. Proxy disclosure
a. Compensation discussion and analysis (CD&A) 162
b. Summary compensation table 163
c. Stock award and option awards columns 167
d. All other compensation column 168
e. Grants of plan-based awards table 169
f. Narrative disclosure 170
g. Outstanding equity awards at fiscal year-end table 171
h. Option exercises and stock vested table 172
2. Stockholder approval disclosure—Item 10 of Schedule 14A
3. Form 10-K periodic reports—Item 601 of Regulation S-K
4. Form 8-K
5. Insider trading—Rule 10b-5
6. Regulation FD and Rule 10b5-1
D. State Blue Sky Laws
E. Sarbanes-Oxley Act
1. Accelerated §16 reporting
2. Trading by insiders during pension blackout periods
3. Prohibition of certain insider loans
F. Dodd-Frank Act

VI. Accounting for Equity-Based Compensation
A. Overview
B. FASB Statement 123 (Revised 2004)
1. Equity instruments
2. Valuation model
3. Cost attribution for vesting
4. Employee stock purchase plans
5. Income tax effects
6. Transition methods
7. Change from liability award to equity award
C. General Concepts of APB 25
1. Fixed plans
2. Variable plans
3. Factors affecting the determination of the measurement date
4. FASB Interpretation No. 44

VII. Miscellaneous Matters
A. Stock Option Exercise Methods
1. Stock swaps and net exercises
2. Broker-financed stock option exercises—Regulation T
3. Broker-assisted sales
4. Employer provided loans—Regulation U
B. Employment and Third-Party Claims
1. Wrongful termination
2. Noncompete provisions
3. Divorce
4. Stock compensation as overtime pay
C. Option Backdating Controversy
D. Deferred Delivery of Option Shares
E. Transferable Stock Options
F. Reload Options
G. Option Repricing/Exchange Programs
1. Option repricing
2. Option exchange program