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2006 Employee Ownership

Conference

April 27, 2006Minneapolis/St. Paul

Equity Compensation Litigation & Enforcement IssuesEquity Compensation Litigation & Enforcement Issues

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Equity Compensation Litigation Trends: Equity Compensation Litigation Trends: Employment, Bankruptcy, Divorce & Employment, Bankruptcy, Divorce &

Plan AdministrationPlan Administration

Daniel N. JanichDaniel N. Janich

Janich Law GroupJanich Law Group222 North LaSalle Street222 North LaSalle Street

Chicago, IL 60601Chicago, IL 60601

312.609.4528312.609.4528

djanich@janichlawgroup.comdjanich@janichlawgroup.com

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Reasons for Increase in Equity Compensation Related Litigation

Prevalence of Equity Compensation in Dot Com Era Popularity of broad based stock option plans = Rank & File Treatment of equity compensation, especially stock options, as integral part of their company compensation

Trend Toward Adoption of Multi-Tier Equity Compensation Programs In Post Dot Com Era Trend

Availability of Equity & Equity-Like Mix: Stock Options, Restricted Stock, Restricted Stock Units, Performance Shares, etc.

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Common Scenarios in Equity Compensation Litigation

� Employment & Plan Administration� problematic plan drafting and administration

� Bankruptcy & Divorce Issues� disputes over rights to ownership

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Current Equity Compensation Litigation Issues

� Employment� Vesting and Exercise Rights

� Stock Plan Administration� Change in Control and Exercise Rights

� Bankruptcy�Inclusion in Bankruptcy Estate

� Divorce� Inclusion in Marital Property or Income

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Employment Issues

Disputes frequently arise from employment termination Vesting Right to Exercise Options Untimely Exercise

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Vesting

Typical vesting issues: Ȭ when is employment “terminated” for vesting purposes?Ȭ when is a grant enforceable?

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Employment Termination DateȬ At will employment status Ȭ Conflicts of law Ȭ Triggering events, such as “merger” or “sale of subsidiary”

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RecommendationsȎ Identify employment termination date for plan purposes; disclaim change in “at-will” statusȎ Specify factual circumstances triggering loss of equity

rights in plan Ȏ Draft documents consistent with provisions in plan and

prior grantsȎ Draft grant that complies with contractual prerequisites

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Right to Exercise Options

Ȭ Various equity plans include exercise rights after employment termination or corporate mergerȬ Litigation frequently arises from miscommunication as to when exercise deadline is enforceable.

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Recommendations

Ȭ Verify that separation agreement addresses equity compensation issuesȬ Confirm that separation agreement describes employment termination consistent with terms of equity compensation plan

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Untimely Option Exercise

Ȭ No fiduciary duty to remind terminated employee of deadline to exercise equity compensation award if otherwise clearly disclosed in award agreement

ȩ Employment termination date should be clearly identified

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Recommendations

Ȏ Ensure no ambiguities in plan definitions and provisions relating to exercise Ȏ Determine effect of collateral documents (i.e., employment agreements, releases, separation & stockholders agreements) upon employment termination date & other exercise rights

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Plan Administration Issues

Change in Control Contract Nature of Grants

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Change in Control

Change in Control What triggers accelerated vesting? When is vesting accelerated?

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RecommendationsȬ Avoid ambiguous accelerated vesting or change in control provisionsȬ Important operative terms in both award and plan Ȭ Exercise caution with black-out periods

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Contract Nature of Grants/Recommendations

ȍ Collateral documents frequently are used to document awardȍ Internal consistency and clarity of documents will

ensure trouble free plan administrationȍ Document used to grant award must be sufficiently definite in its terms to be valid and enforceable

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Bankruptcy Issues

ɢ When is an equity award includible in the bankruptcy estate?

ɢ How are unvested awards treated in bankruptcy proceedings?

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Allocation of Equity Award BetweenBankruptcy Estate and Debtor

ɢ Bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the

[bankruptcy] case.” 11 U.S.C. 541ɢ Equity Award is a contractual right, i.e., a legal interest of debtor

in propertyʚ Fully vested equity award prior to bankruptcy filing is includible

property of bankruptcy estate

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Unvested Awards in Bankruptcy

ʚ Equity award that is unvested upon filing becomes property of bankruptcy estate upon vestingʚ Majority of courts adopt pro-rata approach:

comparing extent to which award was earned pre-petition (allocated to bankruptcy estate) with extent to which services are required post-petition (allocated to debtor)

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Divorce Issues

Ȏ Award as Marital PropertyȎ Allocation and DistributionȎ Inclusion of Award in Child Support Calculation

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Marital Property StatusȪ Equity Award Variables:

Ȫ vesting, forfeiture & continued employment Ȫ nontransferabilityȪ cost of exercising award

Ȫ Equity granted before or after marriage not marital property.Ȫ Exercise during marriage of equity award acquired prior to marriage may result in treatment as marital property

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Equity Award as Marital Property

Ȫ Equity award acquired during marriage treated as marital assets “earned” during marriage.

Ȑ If vested, treated as marital property Ȑ If unvested, treatment as marital property may depend upon primary purpose of grant:

Ȑ compensate for past services (“earned” during marriage)? If so, includibleȐ incentive for future services (rendered after marriage

dissolution)? If so, not includible

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Allocation of Unvested Award in Marital Estate

Ȫ Time Rule FormulaȪ Compare period employee owned equity award

during marriage with period covering date of grant to vesting.

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Distribution

Ȫ Equity award subject to “equitable distribution”Ȫ actual division may be delayed until award is exercisableȪ grantee may be required to notify ex-spouse of exercise of award

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Equity Award as Income for Child Support

Ȫ Vested award treated as income for purposes of support calculation

Ȫ Courts struggle with treatment of unvested awards that vest only after child support obligation is determined

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Professional Biography

Daniel N. Janich is founder and managing principal of Janich Law Group. His practice includes the design of employment and severance agreements, incentive arrangements, stock compensation plans and deferred compensation plans for executives of private and public companies. He counsels companies on employee benefit plan matters, including issues in corporate transactions. An experienced litigator, Mr. Janich has represented individual and corporate clients in numerous benefit and executive compensation disputes in state and federal courts.

He is Co-chair of the Reporting & Disclosure Subcommittee in the ABA Labor Section’s Employee Benefits Committee, and former Chair of the Chicago Bar Association Employee Benefits Committee. Mr. Janich is Associate Senior Editor of and contributor to Employee Benefits Law and contributor to ERISA Litigation. His past speaking engagements include presentations on equity compensation issues at the annual conferences of the National Center of Employee Ownership.

He received a B.A. cum laude from Marian College, J.D. from John Marshall Law School, and LL.M. in taxation from DePaul University.

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Daniel JanichJanich Law Group

222 N. LaSalle Street, Suite 2500Chicago, IL 60601

312-609-4528djanich@janichlawgroup.com

Questions ?