Compensation and Benefits Insights Year in...

Orrick | May 2015 page 1

Compensation and Benefits InsightsYear in Review

December 2015

Orrick | December 2015

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December 2015

e thought you would appreciate aompilation of the alerts we published in015, which covered important issues inhe areas of executive compensation,lobal equity and qualified plans.

opefully this collection will help you notnly know about changes in the law andow to comply, but also what to expect in016.

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Jonathan Ocker

Chair of Orrick’s Compensation and Benefits Group

Orrick | December 2015

Contents

I. Executive Compensation

1. Institutional Shareholder Voting Guidelines 4

2. Practical Advice for IRS 162(m) Regulations 6

3. Changing the Status Quo With Extended Option Programs 8

4. Annual Reporting Requirements for Incentive Stock Options 10

5. IRS Limits Correction Opportunities Under 409A 13

6. Pay for Performance Table and Best Practice Proxy Disclosure 14

7. A Plain English Guide to the SEC’s Compensation Clawback Rules 20

8. SEC Pay Ratio Rules 22

9. Summary of ISS 2016 Policy Announcements 25

II. Global Equity

10. Measures in Favour of Company Savings Plans Under the Macron Law 27

III. Qualified Plans

11. IRS Pulls Determination Letter Program 30

12. IRS Flip Flops on Pension Plan De-Risking Options 32

13. New, Easier & Less Expensive IRS 401(k) Plan Correction Procedures 34

14. The Many Potential Pitfalls of Worker Misclassification 36


Compensation and Benefits Insights

Institutional Shareholder Voting Guidelines

Management Say on Pay and Incentive Plan Proposals, and How to Win a

Proxy Fight Despite a "NO" Recommendation from ISS and/or Glass Lewis

by Jon Ocker, Brett Cooper, Jeremy Erickson and Michael Yang

There is no doubt that Institutional Shareholder Services ("ISS") and Glass Lewis, as

advisors to institutional shareholders, have a significant impact on the level of

shareholder support for a company's Say on Pay and Incentive Plan proposals.

However, a "no" recommendation from either ISS or Glass Lewis does not

necessarily mean that you will fail a Say on Pay or an Incentive Plan proxy proposal.

Instead, if you received a "no" recommendation

from either ISS or Glass Lewis, it is critical that

you take a proactive approach and promptly put

in place a shareholder outreach plan to directly

engage your larger institutional shareholders to

discuss your pay decisions and to ask for their

thoughts on the ISS/Glass Lewis "no"

recommendation. The shareholder outreach

plan is most effective when orchestrated by a

cross-functional team, including your proxy

solicitor, inside and outside legal counsel, the

Compensation Committee's chair and

compensation consultant and internal HR and

investor relations team members.

One of the first tasks for the team is to have your

proxy solicitor arrange for telephone calls with

your larger investors, and it is most effective, if

possible, to have the chair of the Compensation

Committee lead the calls. If that is not possible,

investor relations, internal legal and the head of

HR should take the call. If brief talking points

are prepared to organize the discussion on the

calls, they should not have to be filed in advance

with the SEC. However, if an actual script is

prepared, it would likely be considered

"solicitation materials" and need to be filed with

the SEC as supplemental proxy materials.

Some of the larger and more prominent

institutional shareholders include the following:

BlackRock

T Rowe Price

Vanguard

Fidelity

Morgan Stanley

State Street

Because these institutions have voting

guidelines that are broader than the bright line

quantitative tests of ISS/Glass Lewis and they

tend to look at the big picture and larger time

horizons, often these institutions will not follow

the voting recommendations of ISS/Glass Lewis.

These institutions will, however, want a clear

explanation and perhaps additional disclosure of

how the pay decisions are in the shareholders'

best interests.

If the institutions express support for the "no"

recommendation, then you should consider what

the vote will be with a "no" vote by the particular

institutions and whether it results in less than a

majority or less than 70% approval. A vote of

less than 70% support will result in greater

scrutiny of the Compensation Committee by ISS

in the following year, including a requirement

that the company disclose whether and how it

has adequately addressed shareholder issues


and what changes the company has made to its

compensation programs. Our next Alert will

cover under what circumstances the institutions

will vote against the re-election of the

Compensation Committee members.

If the Company wants to win the Say on Pay

proposal, it has two options. Depending on what

the Company hears from shareholders, the

Company can:

Not change anything but issue a

supplemental proxy explaining how the pay

decisions are in the shareholders' best

interests and continue the dialogue with the

undecided or negative shareholders; or

Reduce compensation and/or add

performance conditions and file an 8-K

regarding these changes to try to get ISS to

change its "no" recommendation and the

large institutions to vote "yes."

For example, the following is a case study with a

couple of examples of strategies for

supplemental disclosures or amendments to

reduce compensation.

Supplemental Disclosure. Let's assume the

shareholder advisory firm recommended a "no"

vote based on a "medium" quantitative concern

and that the resulting qualitative review focused

on excessive CEO pay relative to performance.

Under these circumstances, the supplemental

disclosure should focus on the prior year's good

record of Say on Pay votes and list examples of

the company's good governance/pay practices.

The disclosure should then focus on why the

compensation appeared to be high and offer

extenuating circumstances, e.g., turn around,

outstanding operational results other than TSR

and why the pay decisions were in the

shareholders' best interests looking at the year

in terms of a 3- to 5-year time horizon and the

company's long-term business strategy.

8-K Disclosing Changes in Compensation. If

the Compensation Committee concludes that

changes should be made (and assuming the

same facts), one relatively painless solution is to

add performance conditions to equity grants that

are perceived to be too large. Since the time

period to add performance conditions under

Internal Revenue Code Section 162(m) has

most likely expired, the conditions can be added

as a form of negative discretion that can result in

the reduction of the portion of the award not

earned under the performance condition with no

opportunity as upside. Alternatively, the

Compensation Committee may be able to

persuade the CEO (or other named executive

officers) to waive a portion of his/her long-term

incentive award—it's too late to waive cash

bonuses—for the year. The amount waived

might be the amount necessary to change the

"medium" quantitative concern to a "low"

concern. Unfortunately, companies are not

generally able to determine in advance if their

proposed action will change the advisor's "no"

recommendation, so it is a bit of a gamble and

the change of compensation is generally viewed

as "the court of last resort." In terms of timing

for the 8-K, a Company should assess what the

vote will be after it has engaged in shareholder

outreach and issued a supplemental proxy. If

the solicitor's projected vote percentage is less

than a majority, or if there is a majority approval

that is less than 70% approval and the

Compensation Committee desires greater than

70% approval, then the Compensation

Committee should take action to change the

compensation and file an 8-K at least 5-7

business days before the annual meeting to try

to change the ISS/Glass Lewis voting

recommendation(s).

In preparing for discussions with these

shareholders and preparing any amendments to

compensation, it is important to know each of

their proxy voting guidelines, as summarized in

the charts. More significantly, it is important to

know about these guidelines and the advisors'

policies well in advance of the annual meeting

when designing and disclosing the CEO's pay in

the proxy to avoid a recommended "no" vote.

Orrick | April 2015 page 6


Practical Advice for Compliance with RecentAmendments to the Internal Revenue CodeSection 162(m) Regulations

by Jon Ocker, Christine McCarthy, Juliano Banuelos and Jason Flaherty

The recent amendments to the Section 162(m) regulations largely follow the

changes set forth in the proposed regulations issued in 2011, clarifying two

exceptions from the Section 162(m) tax deductibility limit:

• The treatment of restricted stock units (RSUs) and certain other forms of

stock-based compensation under the transition rule applicable to newly public

companies; and

• The requirement under the "qualified performance-based compensation"

exception to set a per-employee limit applicable to stock options and stock

appreciation rights (SARs) under an equity plan intended to comply with

such exception.

RSU Reliance Period Clarification

Generally, compensation paid by newly public

companies under plans or agreements in effect

prior to the company's initial public offering (IPO)

(for which adequate disclosure is provided in the

IPO prospectus) must be "paid" during the

reliance period to be deemed performance-

based compensation that does not count against

the annual $1 million deduction limitation.

The reliance period ends on the earliest of:

(a) the first annual shareholders meeting at

which directors are to be elected that occurs

after the third calendar year following the

year of the company’s IPO (or, if no IPO, the

first calendar year following the year in

which the company becomes a public

company), (b) the issuance of all employer

stock and other compensation allocated

under the plan or agreement, or (c) the

expiration or material modification of the

plan or agreement.

Under a special equity award rule, stock

options, SARs, and restricted stock that are

granted during the reliance period will be

deemed to be performance-based

compensation (subject to meeting all the

other specific requirements) even if the

equity awards are exercised or vest after the

end of the reliance period.

The final regulations clarify that other forms

of stock-based compensation, most notably

RSUs, do not qualify for the special equity

rule and must be settled during the reliance

period. However, this clarification does not

apply to stock-based compensation granted

prior to April 1, 2015.


Practical Advice

Public companies that want to preserve both

the flexibility of their pre-IPO equity plans

(e.g., evergreen increases to the share

reserve) and the tax deductibility of their

equity award grants may want to consider

the following grant practices:

Grant performance-based restricted

stock in lieu of performance-based RSUs

during the reliance period. Assuming all

of the other requirements are satisfied,

the performance-based restricted stock

will not count against the annual $1

million deduction limitation even if the

vesting and income tax event occurs

after the end of the reliance period.

Whether granting restricted stock or

RSUs, the tax consequences to the

employee generally will be the same

(assuming the employee does not make

a Section 83(b) election to be taxed on

the restricted stock at grant and that the

employee does elect to defer the

settlement of the RSUs).

Grant only stock options during the

reliance period.

Grant a lesser number of RSUs with

modified vesting schedules such that all

or a portion of the RSUs will be settled in

stock during the reliance period.

Per-Employee Limit Clarification

The final regulations retain the rule that using an

aggregate limit on the number of shares that

could be granted under a stockholder-approved

plan will not meet the requirement for

establishing the maximum amount of

compensation that may be received by an

individual covered employee.

This clarification does not apply to stock options

or SARs granted prior to the proposed

regulations' effective date of June 24, 2011.

Further, the limit can be structured to include all

types of equity-based awards, other than stock

options and SARs.

Practical Advice

Public companies that want flexibility with their

plans can have a single limit for all equity grants

or separate limits for different classes of equity

(e.g., separate limits for appreciation-based

awards such as stock options and SARs versus

full-value awards such as restricted stock and

RSUs). Set forth below are example plan

provisions that generally will comply with the

final regulations subject to the specific terms of

the applicable plan:

Single Limit

No participant may be granted one or more

awards during any calendar year covering

more than 10,000,000 shares in the

aggregate.

Separate Limits

Limits on Options. Subject to adjustment

pursuant to Section __, no key employee

shall receive options to purchase shares

during any calendar year covering in excess

of 7,500,000 shares.

Limits on SARs. Subject to adjustment

pursuant to Section __, no key employee

shall receive awards of SARs during any

calendar year covering in excess of

7,500,000 shares.

Limits on Stock Grants and Stock Units.

Subject to adjustment pursuant to Section

__, no key employee shall receive stock

grants or stock units during any calendar

year covering, in the aggregate, in excess of

7,500,000 shares.



Changing the Status Quo With ExtendedOption Programs

by Christine McCarthy and Stephen Venuto

As technology companies find themselves pushing back IPO timelines and staying

private for longer periods of time, they continue to aggressively compete for talent,

often against public companies like Google and Facebook. Given the new dynamic

in the marketplace, enhancing the effectiveness and competitiveness of equity

programs is one area that can help private companies attract and retain talent.

One approach that captured headlines recently

was Pinterest's announcement to offer

employees an extended period of time to

exercise stock options after employment ends.

In a typical private company stock option,

employees are given 3 months after

employment ends to exercise vested stock

options. Under the new extended option

approach, employees will be given a longer

period of time (e.g., 7 years) after employment

ends to exercise vested stock options.

Why Do This?

Employee Morale – Private company

employees often feel pressure knowing that they

may be put in the difficult position of having to

exercise vested stock options within a very short

period of time if their employment ends, causing

them to have to pay a large amount of money

out-of-pocket to cover the exercise price and

taxes that arise in connection with the exercise.

The lower the exercise price and the smaller the

difference between the fair market value and the

exercise price, the less of a concern this is, but it

is often still a concern and it is a concern that

increases for all option holders (even those with

low exercise prices) exponentially as the

company performs well, causing the fair market

value of the shares to increase. Removing this

pressure is a strong signal to employees that the

company cares about their contributions and

wants them to realize the value of the equity that

vests during their time with the company.

Recruiting – As potential new hires compare

offers, the offer of a private company stock

option without strings on the back end can be a

powerful factor in favor of the company offering

it. This can be particularly helpful where a

competing offer of equity is made by a public

company which the recruit knows can translate

into value in the public markets more quickly as

the equity award vests (assuming the equity has

value).

Secondary Sales – In the past few years, we

have seen many companies consider and offer

to employees the opportunity to sell shares while

the company is still private. There are a number

of reasons for offering this benefit, some of

which will continue to make these programs

attractive for private companies, including

companies who offer stock options with

extended post-termination exercise periods. For

others, the promise of a stock option with an

extended post-termination exercise period will

alleviate the pressure to offer employees the

opportunity to sell their shares.

Option Lending Arrangements – Similar to

secondary sale transactions, we expect that

stock options with extended post-termination

exercise periods will reduce the number of

private company employees that seek to borrow

money to exercise options (note that, in some


cases, employees are engaging in these option

lending transactions with the consent of the

company, whereas, in other cases, employees

are doing this without company consent,

whether it is technically required, or not).

What Are the Downsides?

Retention – Some private companies believe

that a short, 3 month post-termination exercise

period is an important retention tool as it can

make it very hard for an employee to leave the

company if they don't have the resources to pay

the exercise price and/or taxes that would arise

upon exercise of their vested options. There is

certainly some truth to this. On the other hand,

employees who feel compelled to stay only for

their already-vested equity may not be the most

motivated, best-performing employees and

companies should consider whether there are

other, maybe better, ways to create retention

incentives for employees.

Dilution – A longer post-termination exercise

period inevitably means more shares will remain

subject to options for a longer period of time,

which can reduce the pool of shares available

for grant to new hires and other employees.

Note, however, that this is not dissimilar to what

happens when private companies grant

restricted stock units to employees and this

doesn't seem to be a major impediment to most

companies.

Accounting – The accounting expense

recognized for these stock options will be higher

than a traditional stock option with a 3 month

post-termination exercise period.

Any Other Considerations?

Outstanding Stock Options – If private

companies offer employees the opportunity to

amend stock options to provide for an extended

post-termination exercise period, the

amendment will in most cases cause any

incentive stock options to convert to non-

statutory stock options immediately upon the

effectiveness of the amendment. Also, private

companies should work closely with their legal,

tax and accounting advisors to ensure there are

no surprises in the amendment process as there

are some important issues to address.

New Stock Options/Tax Consequences –

New stock options with extended post-

termination exercise periods can qualify as

incentive stock options at grant but will

automatically convert to non-statutory stock

options 3 months after employment ends.

Who Should Be Included - Private companies

should consider whether it makes sense to offer

extended post-termination exercise periods on a

broad basis, or on a case by case basis, and

whether it should be offered for outstanding

stock options or just new stock options. Note

that a case by case basis approach minimizes

the downside issues but also minimizes the

benefits related to these arrangements.

Orrick | January 2015 page 10


Annual Reporting Requirements for IncentiveStock Options and Employee Stock PurchasePlans

Annual Information Statements and IRS Returns

by Christine McCarthy and Michael Yang

Requirement to Report

For (1) any exercise of an incentive stock option

(ISO) during 2014 or (2) transfer during 2014 of

a share previously purchased pursuant to a tax-

qualified employee stock purchase plan (ESPP)

where the purchase price paid for the share was

(a) less than 100% of the fair market value on

the date of grant or (b) not fixed or determinable

on the date of grant, the Internal Revenue Code

requires companies to:

furnish, by February 2, 2015, annual

information statements to the participant

who exercised the ISO or transferred the

ESPP share; and

file, by March 2, 2015 (for paper filers) or by

March 31, 2015 (for electronic filers), an

information return with the IRS (please note

that companies may request an automatic

30-day extension of this deadline by filing a

Form 8809, Application for Automatic

Extension of Time to File Information

Returns, with the IRS on or before the

applicable filing deadline).

With respect to reporting ESPP transactions,

companies are required to report the first

transfer of legal title to any share purchased

under an ESPP plan. When a participant's

shares are put into a brokerage account on

behalf of such participant, the transaction is

considered a transfer of legal title and, if it is the

first transfer of legal title of the shares, it must be

reported to the IRS and to the participant. If

instead a participant's shares are issued directly

to the participant or registered in the participant's

name on the company's records, the transaction

does not need to be reported to the IRS or to the

participant because such transaction is not

considered a transfer of legal title.

Participant information statements may either be

delivered or mailed to the participant's last

known address or, if the participant has given

his or her consent to receive the statement

electronically, provided in electronic format. The

consent to receive the statement electronically

must be made in a way that demonstrates that

the participant can access the statement in the

electronic format in which the statement will be

provided. For example, if the statement will be

sent as a Word attachment to an e-mail

message, the consent also must be sent as a

Word attachment to an e-mail message. Further,

the participant must be provided with certain

disclosures related to the consent, including the

right to receive a paper copy and the manner in

which consent may be withdrawn.

Format of Statement/Return

Returns for ISO and ESPP transactions must be

submitted to the IRS on Form 3921 (for ISOs)

and Form 3922(for ESPPs). You may order

Form 3921 and/or 3922 by calling the IRS at 1-

800-829-3676 or through the IRS website

(please note that, even though Forms 3921 and


3922 may be found on the IRS website, you are

not permitted to print and file these forms with

the IRS; the IRS will only accept the official

forms ordered from the IRS).

Participant statements may be provided on Form

3921 (for ISOs) and Form 3922 (for ESPPs) or

may be provided using a different format that

complies with the substitute form requirements

found in IRS Publication 1179. At a minimum,

substitute forms will need to contain all of the

same information as the actual Form 3921 and

3922.

We expect that companies with a limited number

of transactions will likely use Forms 3921 and/or

3922 (as opposed to substitute statements)

since these forms will need to be prepared and

submitted to the IRS in any event. Further, we

expect that companies that provide Form 3921

and/or 3922 to participants (again, as opposed

to providing substitute statements) will deliver

the form(s) to their participants, along with a

cover letter explaining the statement in a

manner similar to this statement for ISO

transactions and this statement for ESPP

transactions.

The IRS requires that a separate Form 3921 or

Form 3922 as applicable be filed with the IRS for

each transaction (i.e., each ISO exercise), even

if one participant has multiple transactions

during the course of the year. If a company

provides participants with an information

statement that meets the substitute statement

requirements, the IRS has indicated that the

company may aggregate transactions and

provide only one substitute statement to each

participant who had multiple transactions during

the year.

Whether you use Forms 3921 and/or 3922, or

you use substitute forms, certain information

must be included in the form, including for ESPP

transactions, the price per share of ESPP stock

transfers. If the exercise price is not fixed or

determinable on the date of grant (e.g., the

exercise price is the lesser of 85% of the fair

market value on the first day of an offering

period or 85% of the fair market value on the last

day of an offering period), you must report the

exercise price as if the purchase occurred on the

grant date (i.e., the first day of the offering

period). In addition, if any individual participant

has more than one ISO transaction or more than

one ESPP transaction in a calendar year, you

must include a unique account number on the

form. The IRS has indicated that this number

may be any number, not longer than 20 digits,

and can contain numbers, letters and special

characters. The unique number assigned to

exercises/purchases by some stock plan

administration programs could be used for this

purpose. Otherwise, you should create a

system to assign numbers to each transaction.

Finally, even though you are only required to

assign unique account numbers if a participant

has more than one ISO or ESPP transaction in a

year, we recommend that you assign a number

to every ISO and ESPP transaction, as we

expect that this will be used by the IRS to

track/locate transactions and will likely be easier

to ensure compliance if it is done consistently for

all transactions.

Electronic Submission of IRS Returns

Companies that are required to file 250 or more

ISO returns or 250 or more ESPP returns to the

IRS must file the ISO or ESPP returns, as

applicable, electronically through the IRS' Filing

Information Returns Electronically (FIRE)

system. To submit through the FIRE system,

you will need to set up a FIRE account through

the IRS website and you will need a Transmitter

Control Code (TCC). If you are using a stock

plan administration firm that will be submitting

these returns on the company's behalf, they will

likely use their TCC. If you are not filing through

a stock plan administration firm and/or do not

have a TCC, you will have to submit a Form

4419, Application for Filing Information Returns

Electronically, so that a TCC can be assigned to

the company. Form 4419 must be submitted to

the IRS at least 30 days prior to filing a return

electronically, and thus, must be submitted no

later than March 1, 2015 (or March 31, 2015 if

an extension is obtained) in order to timely file

Forms 3921 or 3922 electronically. Also, to

submit returns through FIRE, you will need to

create a submission file that meets the FIRE

requirements. These formatting requirements for

FIRE are somewhat onerous and, as a result,

companies will likely need assistance in creating


the submission file due to the formatting

requirements (a number of stock plan

administration firms are equipped to provide this

assistance). In addition, while you are permitted

to voluntarily file electronically, because the

process is challenging and potentially involves

some cost to prepare the necessary file, most

companies with limited transactions will find it

more practical to prepare and file paper returns.

Penalties

The Internal Revenue Code imposes up to a

US$100 penalty for each statement not

furnished, or for each statement furnished to a

participant with incomplete or incorrect

information, up to a maximum penalty of

US$1,500,000 per year. In addition, the Internal

Revenue Code imposes up to a US$100 penalty

for each return not filed with the IRS, or for each

return filed with the IRS with incomplete or

incorrect information, up to a maximum penalty

of US$1,500,000 per year. Greater penalties will

apply if a company intentionally fails to provide a

statement or file a return with the IRS.

Assistance

Please contact any member of Orrick's

Compensation and Benefits Group for further

assistance on meeting these information

statement and return requirements. If you use

an external stock plan administrator, your stock

plan administrator may also be of assistance as

many stock plan administrators have developed

specific services to help companies comply with

these requirements.

Additional Annual ReportingRequirements

Disqualifying Disposition of ISO Shares

A company must report any ordinary income that

an optionee recognizes in connection with a

disqualifying disposition of ISO shares during

the 2014 calendar year in box 1 of the optionee's

2014 Form W-2. Failure to report this income will

prevent a company from taking a deduction for

the ordinary income that results from the

disqualifying disposition and may subject the

company to certain reporting penalties.

A sale of ISO shares before the later of the date

which is two years after the date of grant and the

date that is one year after the date of exercise is

treated as a disqualifying disposition. The

ordinary income recognized on a disqualifying

disposition is equal to the difference between

the ISO exercise price and the lesser of the fair

market value of the shares on the date of

exercise or the sale price of the shares.

Disposition of ESPP Stock

If any person transferred ESPP stock for the first

time during the 2014 calendar year, a company

must report in box 1 of the person's 2014 Form

W-2 the amount of the purchase price discount

(described below), if any, on ESPP stock and, if

the ESPP stock was transferred in a

disqualifying disposition, any ordinary income

that the person recognized when the shares

were transferred. The "purchase price discount"

is the difference between the fair market value of

the shares on the first day of the offering period

and the purchase price that would result if the

shares were actually purchased on the first day

of the offering period. For example, if the

purchase price of the ESPP stock is equal to the

lesser of 85% of the fair market value on the first

day of the offering period and 85% of the fair

market value on the last day of the offering

period (the purchase date), the purchase price

discount is 15% of the fair market value on the

first day of the offering period. Failure to report

this income will prevent a company from taking a

deduction for the ordinary income and may

subject the company to certain reporting

penalties.

A transfer of ESPP stock before the later of the

date which is two years after the first day of the

offering period or the date which is one year

after the purchase date is treated as a

disqualifying disposition. The ordinary income

recognized on a disqualifying disposition is

equal to the difference between the purchase

price and the fair market value of the shares on

the purchase date.



IRS Limits Correction Opportunities UnderSection 409A Proposed Income InclusionRegulations and Imposes 20% Penalty

by Eric Wall, Juliano Banuelos and Jason Flaherty

Background

In Chief Counsel Advice 201518013 (May 1,

2015) (the "CCA"), the IRS addresses an

executive retention bonus that originally vested

after three years and was payable in equal

installments on the first two anniversaries of the

vesting date or, in the employer's discretion, in

a lump sum on the first anniversary of the

vesting date. Recognizing after the adoption

of the bonus plan that the employer's

unfettered discretion to accelerate the second

installment payment causes the bonus plan to

violate the deferred compensation timing rules of

section 409A of the Internal Revenue Code

("section 409A"), the parties amended the

bonus plan prior to the vesting date (but in the

same year as the vesting date) to eliminate the

employer's discretion.

Analysis

Proposed Treasury Regulation section 1.409A-4

(the "proposed regulations") make clear that

the failure of a plan document to comply with

section 409A (a "document failure") may be

corrected with respect to amounts that vest in

future years. However, the proposed

regulations do not address the situation where a

document failure is corrected before the vesting

date but in the year of vesting.

The CCA concludes that a document failure may

not be corrected under the proposed regulations

in the year of vesting and the 20% section 409A

penalty applies to the entire bonus. The CCA

confirms the informal position previously

espoused by IRS officials that has been doubted

by commentators. Presumably, the IRS will also

clarify its conclusion when it finalizes the

proposed regulations.

The CCA does not address the document failure

corrections programs available outside the

proposed regulations (i.e., Notice 2010-6, 2010-

3 IRB 275), which might have offered some

relief from the 20% section 409A penalty under

the facts of the CCA.

Insights

The CCA is a reminder to employers to re-visit

their compensation arrangements prior to the

end of each year to correct any potential section

409A document failures.



Pay for Performance Table and Best PracticeProxy Disclosure

by Jon Ocker and Jeremy Erickson

The SEC recently released its proposed "pay for performance" rules under one

of the last remaining executive compensation requirements mandated by the

Dodd-Frank Act. This new "pay for performance" rule requires companies to disclose

the relationship between the actual compensation paid to their named executive

officers and the company's financial performance as measured by total shareholder

return (TSR).

While numerous other writings have focused on

the technical requirements of the proposed

rules, this alert focuses on the new "pay for

performance" table which would be required to

be included in a company's proxy statement and

best practices to address the additional

requirement of a description of (i) the

relationship between executive compensation

actually paid versus the company's TSR and (ii)

the relationship between the company's TSR

versus the TSR of its peer group.

The proposed rules give flexibility to describe

these relationships in either narrative or graph

form (or both). There will inevitably be some

narrative description, but as a best practice, we

think the use of charts will tell a better story and

be easier for shareholders to visualize and

understand and thus, should be used to help

illustrate the narrative description. We have

provided sample charts below which companies

may consider using in their proxy statements to

satisfy these new proposed disclosure rules (if

adopted).

Pay versus Performance Table

Set forth below is the new table which will be

required to be included in a non-exempt, large

public issuer's proxy statement based on the

proposed rules, which has been populated using

hypothetical numbers. Even though the

proposed rules provide for a two-year phase-in

period, the table includes the full five years of

compensation and TSR for illustration purposes.


Pay versus Performance Table

Compensation versus TSR Charts

Since it may be difficult to understand the link between pay and performance simply based on the

compensation and TSR amounts in the table above, the below chart, which compares changes in Chief

Executive Officer (CEO) and average non-CEO, named executive officer (NEO) actual compensation to

TSR over the same five-year period, provides a useful illustration of the extent to which pay aligns with

performance.

Change in Actual Compensation v. TSR


Based on the proposed rules, executive compensation actually paid is total compensation as disclosed in

the Summary Compensation Table (SCT), modified to exclude changes in actuarial present value of

benefits under defined benefit and actuarial pension plans which are not attributable to the applicable

year of service, and to include the value of equity awards at vesting rather than when granted. Depending

on a company's specific facts and circumstances, there may be material differences between

compensation as reported in the SCT and compensation actually paid. In such a case, it may be

appropriate to include the following chart which compares SCT compensation (not actual compensation)

to TSR.

Change in SCT Compensation v. TSR


TSR versus Peer Group TSR Chart

To address the proposed requirement that a company compare its TSR to the TSR of its peer group, the

below chart provides a useful visual comparison. Based on the hypothetical inputs, there is a tight

correlation.

TSR v. Peer Group TSR

* The chart above assumes an initial investment of $100 at the beginning of 2011.

Optional Additional Charts

The hypothetical amounts in the new SEC table result in illustrative charts which show a favorable

relationship between NEO pay and absolute and relative company TSR. If, on the other hand, the

relationship is not as favorable as this hypothetical situation, or even if it is, but a company's

compensation committee focused on operational results in determining pay, then a company may wish to

include the following table as an optional chart to support its compensation decisions.


Achievement of Operational Goals v. Year-Over-Year TSR

* 100% reflects the break-even point for TSR and full satisfaction of target operational goals.

Enhanced CD&A Disclosure

The proposed new table and its focus on the

new disclosure concepts of actual pay and TSR

will force companies to enhance their CD&A

disclosure to explain the role of actual pay and

TSR in their decision making. For example,

where actual pay is lower than SCT

compensation, a company may want to explain

how and why the pay they actually deliver is less

than what is reflected in the SCT. In addition, if

actual pay levels are high while TSR is also

high, a company may want to justify the higher

pay levels based on the level of shareholder

return. Conversely, where actual pay is high

while TSR is low, but operational results are

positive, a company may want to explain that

while TSR is low, compensation decisions were

driven by operational performance which is

weighted more heavily than TSR. While not

possible to address all the potential

permutations in this alert, the new table will force

companies to better describe and justify the

decisions of compensation committees.

The Role of Absolute and/or RelativeTSR in the Design of Equity-Based,Long-Term Incentives

The new SEC table is quite similar to the

comparisons of pay and TSR which Institutional

Shareholder Services (ISS) currently uses in its

CEO pay and 5-year absolute TSR graph, the

CEO relative degree of alignment test and the

disclosure of other NEO compensation. With the

emphasis on pay and TSR by ISS and the SEC,

we think many issuers may decide to use TSR

as a performance goal for long-term equity

incentives. TSR may be used in the form of an

add-on goal to existing operational goals or as a

modifier or multiplier to operational goals. The

latter may be the best way to acknowledge the

role of TSR as an element of pay for

performance, but not the most important

component.


What To Do Now

While the SEC's proposed rules do not provide

any indication when the new disclosure

requirements will be effective, below are a few

things you should consider to prepare for future

pay for performance required disclosures:

Model actual compensation and your

company's TSR to determine the level of

pay-for-performance alignment and how

best to address any pay-for-performance

disconnect

Determine how and where you will want to

disclose the required information

Review your peer group and determine if

you need to revise it

Make appropriate edits to your CD&A to

reflect the role, if any, of TSR on

compensation for the year

Consider whether to add TSR as a

performance goal to your long-term

incentives

Orrick | July 2015 page 20


A Plain English Guide to the SEC’sCompensation Clawback Rules

by Jon Ocker, Jason Flaherty and Keith Tidwell

As accounting restatements occur relatively infrequently, and the severity is often

modest, the proposed “clawback” rules represent more of a "check the box"

compliance activity than a real enforcement threat.

When to comply?

Technically, adopting a recovery policy is not

necessary until 60 days after the exchanges’

listing standards become effective. However,

the “clawback” rules must be enforced if there is

a restatement during a company’s fiscal year in

which the SEC adopts its final rules. Therefore,

we recommend that our client's compensation

committees be ready to adopt the sample

Compensation Clawback Policy set forth below

shortly after the SEC finalizes its rules. This

could happen as early as Q4 2015 but is more

likely to occur in 2016.

What compensation is covered?

Only performance-based cash and equity

compensation that is granted, earned or vested

based in whole or in part on the attainment of

any financial reporting measure is covered

(“Covered Compensation”). Salaries,

discretionary cash bonuses and equity awards

that vest solely on the passage of time are not

covered.

What executives are covered?

The rules apply to all current and former

executive officers, whether or not an officer is at

fault, who receive payments of Covered

Compensation during the three completed fiscal

years (the “Covered Period”) preceding the date

the company is required to prepare the

accounting restatement (the “Covered

Executives”). For example, if a calendar year

company concludes in November 2018 that a

restatement is required for 2017 and files it in

January 2019, the Covered Period will be 2015,

2016 and 2017.

What must be recovered?

The company must recover from each Covered

Executive that portion of Covered Compensation

that would not have been paid or earned if the

financial statements issued during the Covered

Period had been properly prepared. This

includes Covered Compensation to the extent

the restatement affects stock price.

How is it recovered?

Direct repayment of the affected Covered

Compensation on a pre-tax basis is required;

however, when that is not practicable,

companies can cancel unvested equity and

deferred compensation. To facilitate the

enforcement of such measures we recommend

that companies build into bonus participation

agreements, performance share and unit grant

agreements and deferrals of compensation, the

Covered Executives’ acknowledgement and

consent to such actions. Recovery is not

required if the direct costs of seeking recovery

would exceed the recoverable amount or if

recovery would violate the company’s home

country laws.


When is a restatement required?

A restatement is generally required when the

company concludes, or reasonably should have

concluded, that previously issued financial

statements contain a material error. Currently,

companies must file a Form 8-K when they

conclude they have filed erroneous financial

statements that should no longer be relied upon.

Sample Compensation Clawback Policy:

The compensation committee will recover from

any current or former executive officer,

regardless of fault, that portion of performance-

based compensation based on financial

information required to be reported under the

securities laws that would not have been paid in

the three completed fiscal years preceding the

year(s) in which an accounting restatement is

required to be filed to correct a material error.

This policy will be enforced and appropriate

proxy disclosures and exhibit filings will be made

in accordance with the SEC's clawback rules

and our exchange listing standards.

Orrick | August 2015 page 22


SEC Pay Ratio Rules—A Recipe forCompliance and Model Disclosure

The SEC recently adopted its final pay ratio disclosure rules.

by Jeremy Erickson, Keith Tidwell and Christine McCarthy

Commencing in early 2018, public companies will have to disclose (i) their CEO’s

total annual compensation, (ii) the median total annual compensation of all of their

employees (other than the CEO), and (iii) a ratio comparing the two values. This

alert explains step-by-step how to comply with the final rules and concludes with a

model disclosure.

Step 1: Determine the CEO’s TotalAnnual Compensation

The CEO’s total compensation will be as

reported in the Summary Compensation Table.

If the company had more than one CEO during

the year, it must either: (i) aggregate the total

compensation that was paid to each individual

who served as CEO during the year, or (ii)

annualize the compensation paid to the

individual serving as CEO on the determination

date the company selects to identify the median

employee. The company must disclose which

method it chose and how it calculated the

annual total compensation.

If a CEO’s salary or bonus is not yet calculable,

the company may omit its disclosure until such

amounts are determinable and disclose when

this is expected. Once the information is

available, the company’s disclosure would then

be filed under Item 5.02(f) of Form 8-K.

Although an Item 5.02(f) filing would be triggered

when the CEO’s omitted salary or bonus

becomes calculable in whole or in part, the pay

ratio disclosure is only required when the CEO’s

salary or bonus becomes calculable in whole.

Step 2: Determine the Median TotalAnnual Compensation for All OtherEmployees

The final rules define “employee” to include all

worldwide full-time, part-time, seasonal, and

temporary employees employed by the company

or any of its consolidated subsidiaries. This

does not include independent contractors or

“leased” employees as long as they are

employed, and their compensation is

determined, by an unaffiliated third party. Given

recent controversy surrounding this part of the

final rules, companies may want to consult their

legal expert on whether independent contractors

that are self-employed are required to be

counted. Fortunately, the final rules afford some

flexibility with respect to identifying the median

employee as explained below.

International Employees

The company may exclude non-U.S. employees

from its determination of median employee in

two limited instances.

Foreign Law Exemption: If compliance with

the final rules would cause the company to

violate foreign data privacy laws or regulations,

the employees of that foreign jurisdiction may be


excluded. Reasonable efforts must first be

made to seek an exemption or other relief under

the foreign data privacy laws before relying on

this exemption. The company also must obtain

a legal opinion from counsel opining on the

inability to comply with the final rules without

violating foreign laws and file such opinion as an

exhibit to the filing in which the pay ratio

disclosure is included.

De Minimis Exemption: If the company’s non-

U.S. employees account for 5% or less of its

global workforce, all of the non-U.S. employees

may be excluded. If the non-U.S. employees

exceed the 5% threshold, the company may

exclude up to 5% of its global workforce who are

non-U.S. employees. However, non-U.S.

employees excluded under the foreign law

exemption will count against this 5% cap.

If any non-U.S. employees in a particular

jurisdiction are excluded, all non-U.S.

employees in that jurisdiction must be excluded.

Cherry-picking within jurisdictions is prohibited.

Identifying Median Employee Once Every

Three Years

The company may identify its median employee

once every three years unless there has been a

change in its employee population or employee

compensation arrangements that it reasonably

believes would result in a significant change in

the pay ratio disclosure. Also, if the identified

median employee’s compensation changes, the

company can use another employee who

previously had substantially similar

compensation. The company must disclose

whether it uses the same median employee for

three years or a different median employee.

Three-Month Determination Date Window

The company may use any date within three

months prior to the last day of the year to

determine the employee population for purposes

of identifying the median employee. For

example, choosing a date before the holidays

could avoid the inclusion of seasonal

employees. The chosen date (or a change in

the date from a prior year) must be disclosed.

M&A Employees

The company may exclude any employees of an

entity that was acquired by the company during

the covered fiscal year (but not future years).

The company would have to disclose the identity

of the acquired company and the approximate

number of employees excluded.

The final rules also provide additional flexibility

in calculating the median employee’s total

annual compensation.

Reasonable Estimates: Reasonable estimates

such as statistical sampling are permitted, but

the company must disclose any material

assumptions, adjustments or estimates used to

identify the median employee and determine the

total annual compensation.

Annualizing Adjustments: The company may

annualize the compensation of a permanent

employee (full- and part-time) who did not work

for the entire year but not the compensation of

temporary or seasonal employees. Full-time

adjustments for part-time employees is also

prohibited.

Cost-of-Living Adjustments: The company

may make cost-of-living adjustments to the

compensation paid to employees in jurisdictions

other than the jurisdiction where the CEO

resides. If the company uses this adjustment, it

must use the same cost-of-living adjustment in

calculating the median employee’s annual total

compensation and disclose (i) the median

employee’s jurisdiction, (ii) the median

employee’s annual total compensation and the

pay ratio, both with and without the cost-of-living

adjustment, and (iii) a description of the cost-of-

living adjustments used.

Step 3: Formulate the Pay Ratio

The pay ratio must be expressed either (i) as a

ratio in which the annual total compensation of

the median employee is equal to one (e.g., 100

to 1 or 100:1), or (ii) narratively in terms of the

multiple that the CEO’s total annual

compensation bears to the annual total

compensation of the median employee.


Step 4: Prepare the Disclosure

The pay ratio disclosure will have to be provided

in all filings in which executive compensation

disclosure is required by Item 402 of Regulation

S-K (e.g., Form 10-Ks, proxy and information

statements and registration statements) but not

in periodic filings such as Form 8-Ks or 10-Qs.

As with other executive compensation

information, the Form 10-K can incorporate this

disclosure from a proxy statement that is filed

within 120 days after the end of the fiscal year

covered by the Form 10-K. After the initial pay

ratio disclosure, the company will be able to

benchmark how its pay ratio compares to peer

group members. We expect there will be more

commentary on how companies rank and why

the pay ratios are what they are by the 2019

proxy season.

Supplemental Disclosure. The company may

supplement its pay ratio disclosure by providing

additional pay ratios or a narrative discussion to

address any unwarranted conclusions that may

be drawn from its disclosure. Any additional

ratios must be clearly identified, not misleading

and not presented with greater prominence than

the required ratio.

Model Disclosure

Our Compensation Committee reviews the

internal pay ratio between the CEO’s total

compensation and other named executive

officers and the median annual total

compensation of all employees (excluding the

CEO). We identified the “Median Employee” by

taking a statistical sampling of the annual total

compensation of all full-time, part-time,

seasonal, and temporary employees employed

by us on [Date]. In making this determination,

we used a sample size of [x] from a population

size of [y]. Our CEO had annual total

compensation of $10,000,000, and our Median

Employee had annual total compensation of

$100,000. Therefore, our CEO’s annual total

compensation is 100 times that of the median of

the annual total compensation of all of our

employees.

Orrick | November 2015 page 25


Summary of ISS 2016 Policy Announcements

by Brett Cooper, Jeremy Erickson and Keith Tidwell

Institutional Shareholder Services (ISS) issued new U.S. voting policies and an

updated Equity Plan Scorecard FAQ, both effective for annual shareholder meetings

occurring on or after February 1, 2016. This alert provides a brief summary of the

key U.S. policy changes and the updates to the Equity Plan Scorecard that will be in

effect for the 2016 proxy season.

Director Overboarding

ISS has lowered the acceptable number of

public company board seats a non-CEO director

may occupy from six to five (the board under

consideration plus four others). However, ISS

will not recommend withhold votes against

directors sitting on more than five public

company boards until 2017. Instead, ISS will

issue cautionary language in proxy advisory

research reports for those directors considered

“overboarded” under the new policy (but not the

former policy). This will allow overboarded

directors a one-year grace period to plan for an

orderly transition in reducing their board

commitments.

ISS has not changed its policy threshold at

which a public company CEO will be considered

overboarded—currently set at no more than two

outside board seats—though it did express that

it may reconsider this threshold in the future as

policy surveys indicate that many investors

believe only one outside board commitment is

an appropriate threshold for CEOs.

Compensation of Externally-ManagedIssuers

Externally-managed issuers (EMIs) are

companies that do not directly compensate their

executives; rather, they leave compensation

matters to an external manager who is

reimbursed by the EMI through a management

fee. The insufficient disclosure of compensation

arrangements for executives at an EMI has not

been considered a problematic pay practice.

Under the revised policies, an EMI’s failure to

provide sufficient disclosure for shareholders to

reasonably assess compensation for the NEOs

will be deemed to be a problematic pay practice,

which will warrant a recommendation against the

EMI’s say-on-pay proposal.

Unilateral Governance ChangesAdversely Affecting Shareholder Rights

ISS issued two new policies relating to unilateral

board actions (i.e., those without shareholder

approval) that adversely affect shareholder

rights: one for established public companies

and another for newly public companies that

have taken actions (e.g., amending bylaw or

charter provisions) to diminish shareholder rights

prior to or in connection with an initial public

offering (IPO). This bifurcation was made to

reflect the differing expectations investors may

have for established public companies versus

newly public companies. These two policies are

as follows:

Orrick | November 2015 page 26

For established public companies, ISS will

generally continue to withhold votes from

directors who unilaterally adopted a

classified board structure or implemented a

supermajority vote requirement to amend

the bylaws or charter.

For newly public companies, ISS will take a

case-by-case approach and give significant

weight to shareholders’ ability to change the

governance structure in the future through a

simple majority vote and their ability to hold

directors accountable through annual

director elections. If the company publicly

commits to putting the adverse provisions to

a shareholder vote within three years of the

IPO, that can be a mitigating factor. Query

whether this policy will have any impact

since most companies obtain shareholder

approval of their governing documents as

part of the IPO process.

Unless these adverse actions are reversed or

submitted to a binding shareholder vote, in

subsequent years, ISS will vote case-by-case on

director nominees.

Proxy Access

ISS has not changed its fundamental approach

to management and shareholder proxy access

proposals, but it is planning to release an FAQ

next month to provide more information on

which additional provisions ISS considers overly

restrictive. This FAQ will also clarify the

framework ISS will use to analyze proxy access

nominations, which is expected to be

conceptually similar to that used for proxy

contests.

Updated Equity Plan Scorecard Changesfor 2016

ISS’s updated Equity Plan Scorecard FAQ

contains a new “Special Cases” model (formerly

the IPO model) that analyzes companies with

less than three years of disclosed equity grant

data (generally, IPOs and bankruptcy-emergent

companies) and includes Grant Practice factors

other than Burn Rate and Duration for

companies in the Russell 3000/S&P 500. The

maximum pillar scores for this model are as

follows:

Plan Cost: 50

Plan Features: 35

Grant Practices: 15

The Plan Features factor known as “Automatic

Single-Trigger Vesting” is renamed as “CIC

Vesting,” with the following scoring levels:

Full points if the plan provides: (i) for

outstanding time-based awards, either no

accelerated vesting or accelerated vesting

only if awards are not assumed/converted;

AND (ii) for performance-based awards,

either forfeiture or termination of outstanding

awards or vesting based on actual

performance as of the CIC and/or on a pro-

rata basis for time elapsed in ongoing

performance period(s).

No points if the plan provides for automatic

accelerated vesting of time-based awards

OR payout of performance-based awards

above target level.

Half points if the plan provides for any other

vesting terms related to a CIC.

ISS has increased the threshold requirement for

full points under the Post-Vesting/Exercise

Holding Period Plan Feature to 36 months (up

from 12 months) or until employment

termination. Holding periods of 12 months will

only accrue half of the points.

Orrick | October 2015 page 27


Measures in Favour of Company SavingsPlans Under The Macron Law

by Anne-Sophie Kerfant and Margaux Azoulay

Enacted on 6 August 2015, France's law for growth, activity and equal economic

opportunities, known as the "Macron law", designed to boost the French economy,

aims to "establish equal economic opportunities and increase economic activity by

removing restrictions, promoting investment and creating jobs".

Certain employee share ownership schemes,

RSU (French AGA) and BSPCE (warrants for

business creator shares) are at the heart of the

new measures adopted by the Macron law. The

legislator wishes to encourage employees'

involvement in the growth of the company (or

group of companies) in which they work and

invest themselves each day. Through a

reduction in compulsory contributions applying

to RSU and a loosening of granting conditions of

BSPCE, the Macron law provides companies

with greater flexibility in the implementation of

their policies for their employee incentive

schemes.

Changes made to RSU Regime

Applicable to RSU's authorised by an annual

general meeting of shareholders held on or after

7 August 2015, the new provisions aim to

increase the attractiveness of RSU schemes by

reducing the legal constraints and the weight of

tax and social security contributions both for

employees and companies.

Easing of Legal Constraints

Before the Macron law came into force,

employees that were granted RSU could own

and dispose of the shares only after a total

period of four years, generally comprising (i) a

vesting period of at least two years, followed,

where the vesting period was less than four

years, (ii) by a holding period of at least two

years.

The Macron law reduces the minimum vesting

period from at least two years to at least one

year and removes the obligation for the

extraordinary general meeting of shareholders to

set a holding period, provided there is a period

of at least two years between the shares being

granted and the date on which when they are

sold. In practice, the extraordinary general

meeting may decide a vesting period and a

holding period of one year each or, alternatively,

just a vesting period of two years.

Reduction of the Tax and SocialPressure on Employees:

Attribution gains, taxed in respect of the year

in which the shares are sold, are no longer taxed

under the category of wages and salaries and

social contributions applicable on income of 8%,

but under the category of capital gains on

securities and social security contributions on

investment income. Accordingly, subject to the

beneficiaries keeping the shares that are issued

to them following the vesting period for at least

two years, the attribution gains are subject to

progressive income tax but reduced (i) by tax

relief for the holding period as provided for by

law (50% for a holding period of more than two

years, or 65% for a holding period of more than

eight years) or, if applicable, (ii) by a specific tax


relief for the holding period (50% for a holding

period of at least one year, or 65% for a holding

period of between one and four years, or 85%

for a holding period of more than eight years)

applying to shares in a small or medium-sized

enterprise (SME)[1] subscribed or acquired in

the 10 years following its incorporation, to sales

of shares within a family group, and to sales of

shares undertaken by a director upon retirement

(after, in the last case, an additional specific tax

relief of €500,000). The gains will, moreover, be

subject to social security contributions at the rate

of 15.5%. The treatment of tax and social

security contributions on gains realised on the

sale of the shares remains unchanged.

In practice, when shares from RSU's are sold,

the total taxable gains will be equal to the sale

price of the shares, reduced by tax relief for the

holding period, running from the date the shares

are delivered.

Employee social security contributions,

which were until now paid by the employee

when the shares were sold, at a rate of 10% and

calculated on the gains on acquisition, are no

longer levied for RSU's granted on the basis of

the decision adopted by a shareholders' general

meeting held on or after 7 August 2015.

Reduction of the Tax and SocialPressure on the Employer:

Employer social security contributions,

levied on employers when RSU's are granted, is

reduced from 30% of the value of the shares on

their granted date to 20% of the value of the

shares on their delivery date (please note that

employers may no longer base these

contributions on the value of the shares as

estimated for the needs of their consolidated

financial statements).

These contributions will, therefore, now be due

(i) when the RSU's are delivered (and no longer

when they are granted) and (ii) calculated on the

fair value of the benefit granted to the

beneficiary, thus taking into account staff

turnover between the acquisition date and

delivery date of the shares as well as the risk

arising from the almost systematic introduction

of any presence or performance conditions in

the plan rules.

Finally, in order not to penalise rapidly growing

SME's and to encourage them conducting a

reinvestment policy rather than a distribution

policy, the Macron law exempts such companies

from employer social security contributions,

provided that they have not distributed any

dividends since their creation and the RSU's are

allocated within the social security annual

threshold (up to €38,040 for 2015) for each

employee.

Easing of Conditions for BSPCE

BSPCE entitle their holders to subscribe shares

of a company at a pre-determinated price set on

the day the BSPCE's are granted by the

extraordinary general meeting of shareholders.

This scheme, mainly intended for start-ups and

innovative young businesses, enables such

companies to incentivise their employees with

the benefit of an attractive tax and social

treatment.

Reserved to stock companies, subject to

corporate income tax in France, which have

been incorporated for less than 15 years,

unlisted or whose market capitalisation is less

than 150 million euros, and owned for at least

25% by individuals (or by companies directly or

indirectly owned for at least 75% by individuals it

being specified that holdings held by certain

entities such as French venture capital funds

(FCPR) are not taken into account for the

determination of these thresholds), the scope of

application of BSPCE was restricted because

they could not be granted to employees of the

issuer's subsidiaries nor issued by a company

created from a reorganisation of companies.

The Macron law, applicable to BSPCE granted

on or after 7 August 2015, aims to ease these

conditions.


Extension of BSPCE to Companiesresulting from a reorganisation

In order to end this restriction, which acted as a

restraint on the growth of young businesses,

especially on their ability to attract new talents,

the Macron law now allows companies resulting

from a reorganisation (i.e. from a merger,

restructuring, extension or resumption of pre-

existing activities) to issue BSPCE. They must,

of course, meet all the aforementioned

conditions; it being specified, however, that a

company's market capitalisation should be

calculated by aggregating the market

capitalisations of all the companies formed from

the reorganisation operation. Moreover, the age

of the company or companies will be determined

by using the earliest creation date of companies

having taken part in the reorganization.

Extension of the scheme to employeesand directors of certain subsidiaries

The Macron law, moreover, extends the scheme

to employees and directors of the issuer's

subsidiaries provided such subsidiaries are

owned at 75% by the issuer and meet the

aforementioned eligibility conditions. In

particular, given that the subsidiary whose

employees or directors are granted BSPCE

must be subject to corporate income tax in

France, it must be noted that only employees

and directors of French subsidiaries will be

eligible for the BSPCE. It is likely that this

restriction will be contested and will need to be

corrected in the future, to the extent that it

constitutes a restriction to the freedom of

establishment within the European Union.



IRS Pulls Determination Letter Program

Puts Premium on Plan Assessments by Sponsors

by Yvonne Nyborg, Patricia Anglin and Mitchel Pahl

Effective January 1, 2017, the IRS has announced that, due to limited resources, it is

eliminating the existing 5-year determination letter application staggered filing cycles

for individually designed plans. Off-cycle filings are eliminated immediately.

Determination letter applications will no longer

be accepted for individually designed plans,

other than:

Plans that have not received an initial

determination letter (no matter when

adopted) can apply for an initial

determination letter.

Terminating plans can apply for a

determination upon termination.

Cycle E filers (EIN ending in 5 or 0) can

continue to file through January 31, 2016.

Cycle A filers (EIN ending in 1 or 6 and

Cycle A controlled groups) can file during

the last Cycle A, which begins February 1,

2016, through the end of the Cycle on

January 31, 2017.

Certain other limited circumstances as yet to

be determined.

This announcement does not address the

existing six-year filing cycle for volume submitter

plans, which can be filed on a Form 5307 if they

have been modified by some limited individually

designed language. The existing six-year filing

cycle for volume submitter plans ends on April

30, 2016. Master/prototype plans, and volume

submitter plans with no modifications to the pre-

approved document (except to select among

options under the plan) have not been allowed

to file since May 2012, and must rely upon the

plan's opinion letter.

Under the current system, deadlines for

adopting legally-required amendments often

were extended to the end of the applicable filing

cycle. These filing cycle extensions will no

longer be available for individually designed

plans after December 31, 2016, although the

IRS has announced that it intends to extend the

deadlines for individually designed plans to a

date that will be no earlier than December 31,

2017.

The IRS is requesting comments (October 15,

2015 deadline) on the related issues, such as

the legally-required amendment rules and

deadlines, the EPCRS correction program, and

guidance for individually designed plans

converting to pre-approved plans.

Routine Plan Health Check AssessmentsNow In Order

Prior to this change, it was relatively easy to

correct errors in plan amendments – as the IRS

allowed sponsors to retroactively fine-tune their

amendment language, and even adopt new

retroactive amendments in certain cases, during

the determination letter review process. This

flexibility is now gone under the new system,

and it will be more important than ever to adopt

carefully drafted legally-required amendments

on time. Otherwise, the Employee Plans

Compliance Resolution System (EPCRS) will be

the only alternative for fixing plan document


errors retroactively. Employers should also

consider performing their own document

compliance checks on a scheduled basis now

that the IRS determination letter process will no

longer serve that purpose. Keep in mind,

however, that typically most plan errors are not

plan document defects, but rather operational

defects, which have never been reviewed within

the determination letter process but rather are

correctable under the EPCRS program.

Cycle E filers (EINs ending in 5 or 0) and Cycle

A filers (EINs ending in 1 or 6 and Cycle A

controlled groups) now have their last chance to

apply for an updated determination letter prior to

the plan's termination, unless special

circumstances apply in the future. Cycle E

began February 1, 2015 and ends January 31,

2016, and Cycle A begins February 1, 2016 and

ends January 31, 2017. Volume submitter plans

with limited individually designed language

should file during the current six-year cycle,

which ends April 31, 2016, as the future of the

pre-approved determination letter filing program

is uncertain.



IRS Flip Flops on Pension Plan De-RiskingOptions

by Jason Flaherty, Patricia Anglin and Yvonne Nyborg

The volatility and unpredictability of an employer's obligations under a defined

benefit pension plan can have a significant impact on its bottom line. This is

especially true of plans with liabilities for pension benefits earned decades ago and

being paid as annuities. Companies faced with this volatility have implemented

various "de-risking" methods for their pension plans in order to reduce or eliminate

the volatility associated with pension obligations and their impact on the balance

sheet.

For the last several years, the IRS has issued

Private Letter Rulings to pension plans allowing

retirees to convert their annuities to lump sums.

This de-risking option first hit the news in 2012

when General Motors offered lump sum

conversions to 44,000 retirees.

The IRS just announced in Notice 2015-49 that it

intends to propose regulations to be effective as

of July 9, 2015 that prohibit all conversions of

existing defined benefit plan annuity payments

into lump sums, other than conversions under

certain grandfathered programs.

To be grandfathered, the program has to meet

one of the following requirements prior to July 9,

2015: (1) be adopted or specifically authorized

by a board, committee, or similar body with

authority to amend the plan; (2) been

communicated to participants in writing; (3) been

adopted pursuant to collective bargaining; or (4)

have been approved by a private letter ruling or

determination letter.

De-Risking Options Still Available

Lump sums. Although the IRS has shut down

the option of offering lump sums to retirees in

pay status, other de-risking options remain

available. Plan sponsors can add a permanent

lump sum option to their pension plans for active

employees or offer a limited lump sum window

opportunity for certain categories of plan

participants, the most popular being a lump sum

window for deferred vested participants (DVPs).

Lump sum options transfer the risk of providing

a future stream of income payments from the

pension plan to the retiree.

Boosting Plan Savings on Lump Sums. If

you are contemplating the addition of lump sums

to your pension plan, you can boost your

savings by changing your lump sum interest

rate. You will have to use the Code section

417(e) rates as a minimum, but you can change

the time as of which this interest rate is

determined, as long as you adopt the same

timing rule for both small and large lump sums.

If you are contemplating a lump sum window for

DVPs, it might be worth reviewing current

interest rate trends and changing your timing

rule to take advantage of higher rates, which

result in smaller lump sums. You will have to

grandfather the old timing rule for small cash-

outs, if more favorable, for one year, but the

grandfather does not apply to any lump sum

options that previously were not offered under

the plan.


Annuitizing Plan Liabilities. Alternatively,

plan sponsors can still transfer their pension

plan liabilities to insurance companies, either

with plan assets or without.

The remaining de-risking alternatives for

pension plans raise complex legal, accounting,

funding, design, actuarial, PBGC and employee

relations issues for companies. Each alternative

requires a significant amount of time to analyze

and implement.

If your company has been considering whether

to de-risk its pension plan liabilities, now may be

the time to act. Although transferring pension

plan liabilities to participants through lump sums

and to insurance companies through annuity

purchases is not a new concept, lately it has

been getting more attention from politicians and

regulators as more and more companies

implement de-risking strategies.

There is a real conflict between those who want

to preserve annuities as the preferred source of

retirement income and those who want to de-risk

pension plans. It is no secret that the IRS and

the DOL take a paternalistic view of the ability of

retirees to manage their retirement income so

that it will last throughout their retirement years.

On the other hand, many corporate plan

sponsors will not like this new IRS position and

could lobby Congress to act to reverse it. We

will be monitoring this situation and working with

clients to develop the best possible strategies.

Orrick | June 2015 page 34


New, Easier and Less Expensive IRS 401(k)Plan Correction Procedures

The IRS has recently issued three new, less expensive safe harbor procedures

for correcting missed elective deferrals.

by Patricia Anglin, Yvonne Nyborg and Mitchel Pahl

These new procedures require either no employer corrective contribution to make up

the missed elective deferrals, or only a 25% contribution, depending upon how soon

detection of errors and correction occurs.

The new procedures are intended to address the

"windfall" that employees receive when they

collect their full pay and also receive the current

50% make-up corrective contribution, and to

encourage plan sponsors to adopt automatic

contribution and escalation arrangements.

No employer corrective contribution to make

up for missed elective deferrals is required if

correct deferral amounts begin to be

deducted from future paychecks by the first

paycheck on or after:

the last day of the three-month period that

begins on the date on which the error first

occurred; or

the last day of the 9-1/2-month period

following the Plan year in which the error

first occurred (October 15 for calendar

year plans), if the error is an improperly

implemented automatic contribution or

automatic escalation arrangement (including

improperly implemented affirmative elections

thereunder); or

the month after the month the employer is

notified of the error by the participant, if

earlier.

A 25% employer corrective contribution

(adjusted for earnings) to make up for missed

elective deferrals is required if:

correct deferral amounts begin to be

deducted from future paychecks by the first

paycheck on or after;

the last day of the second plan year

following the Plan year in which the error

first occurred; or

the month after the month the employer is

notified of the error by the participant, if

earlier; and

the 25% corrective contribution (adjusted

for earnings) is made by the last day of the

second plan year following the Plan year

in which the error first occurred.

Match make-up deadline: no matter which of

these three new correction procedures are used,

100% of the missed matching contributions

(adjusted for earnings) still must be contributed

by the employer. The deadline for the matching

contribution make-up is the same for all three

new procedures: the last day of the second

plan year following the Plan year in which the

error first occurred.

Orrick | June 2015 page 35

Notice requirement: all three procedures

require that a special notice be provided to

affected participants by the 45th day after the

date on which prospective correct deferrals

begin. The notice generally must describe the

error and the correction, including the date the

error began and the percentage of

compensation that should have been deferred,

and inform the participant that he/she may

increase his/her future deferral percentage in

order to make up for the missed deferrals within

the annual deferral limit. Specific dollar amounts

do not have to be provided.

Earnings: If the participant has not made an

investment election, earnings can be calculated

on the basis of either

the rate of return under the Plan as a whole

(the usual method); or

the Plan's default investment alternative

(this is new).

If earnings on corrective matching

contributions using the Plan's default

investment alternative are negative,

cumulative losses may not reduce the

principal amount of the corrective matching

contributions.

What To Do?

In order to take advantage of the new

procedures, early detection is key. Plan

administrators may wish to consider developing

procedures to detect and correct missed

deferrals on a semi-annual basis – or, if the

three-month correction method is desired, even

more frequently.

Orrick | December 2015 page 36


The Many Potential Pitfalls of WorkerMisclassification

by Laura Becking, Patricia Anglin, Mitchell Pahl and Michael Yang

These new procedures require either no employer corrective contribution to make up

the missed elective deferrals, or only a 25% contribution, depending upon how soon

detection of errors and correction occurs.

Worker classification is an area of major concern

for domestic and international employers of all

sizes. Our Labor and Employment Group

recently alerted you to significant regulatory

action by the US Department of Labor relating to

classification of workers as employees versus

independent contractors. Those regulations,

along with continuing action by the National

Labor Relations Board and the IRS in this area,

highlight that worker classification issues are

being closely scrutinized today. These issues

will continue to present employers with the

difficult task of managing service relationships to

meet their business needs while ensuring proper

classification of their workers under the various

legal regimes that apply.

The effects of misclassification can reverberate

throughout an employer’s Human Resources

and employee benefit plan functions. To ensure

a comprehensive approach to maintaining

compliance, an employer must identify and

tackle all of the many issues that arise from

misclassification. Below is a list of

misclassification issues for year-end review:

back pay (e.g., minimum wage and overtime

pay);

failure to withhold and underpayment of

Federal and state/local income and

employment taxes;

failure to provide proper wage statements,

such as Forms W-2;

failure to provide employee benefit coverage

and appropriate remedial action;

failure to make employer and employee

contributions to retirement and other

employee benefit plans;

failure to provide required benefit plan

disclosure and administrative notices;

excise taxes under the Affordable Care Act

(the “ACA”) for failure to provide required

health plan coverage;

civil tort liability to a misclassified worker as

well as third parties who are injured as a

result of a misclassified worker’s negligent

acts; and

violations of state, federal and/or foreign

labor laws, which may include civil penalties

and/or notice requirements imposed by the

government agency.

In the remainder of this Alert, we focus on the

impact of the ACA and other misclassification

risks that arise in the context of managing

employer health and welfare plans and highlight

certain global considerations. We conclude with

our recommendations on preemptive steps to

avoid worker misclassification issues.


Impact of the Affordable Care Act

Many aspects of the ACA, including employer

coverage responsibilities and the calculation of

penalties for failure to provide compliant health

coverage, depend on whether an individual is

properly classified as an “employee,”

significantly increasing the adverse

consequences of misclassification. To make

matters worse, one misclassification may trigger

the assessment of ACA excise tax penalties

based on the employer's entire full-time

workforce.

Furthermore, the ACA has resulted in many

employers struggling with “joint employment”

and “co-employment” issues with their staffing or

other service providers. Abundant caution is

necessary with worker classification in this area

because a mistake could result in both ACA

non-compliance as well as liability for

misclassification as listed above.

One step employers should take now is to

review existing contracts with staffing or other

service providers to reduce their potential legal

exposure. Employers should require that

service providers provide ACA-compliant

coverage to their full-time employees and

acknowledge sole responsibility for the

classification of those employees.

Service provider contracts also should address

potential co-employment issues by stating that

the provider’s workers are solely its common law

employees and that the provider exclusively

manages all employee issues regarding

compensation, performance issues, time off, and

any other HR-related issues that typically are the

responsibility of an employer.

Finally, the contract should contain indemnities

specifically targeted to require the provider to

indemnify employers for misclassification errors

of their employees and any ACA penalties.

Other Misclassification Risks for HealthPlans

Treatment of Misclassified Employees Under

Plan Document

In light of the ACA, most health plans (both

insured and self funded) exclude independent

contractors from coverage. Without an express

provision to the contrary, an independent

contractor that is reclassified as an employee

may become eligible for coverage under a

health plan – including retroactive coverage.

Some employers address this issue by including

express language in their health plans that

excludes reclassified workers from coverage.

This type of provision can protect an employer

from claims for retroactive coverage and enable

the employer to exclude reclassified workers

from future coverage.

Often health insurance policies do not contain

the appropriate language to exclude reclassified

workers from coverage because insurers will not

entertain changes to their standard format. We

recommend that employers determine whether

their insurance policies contain appropriate

language to exclude reclassified workers

because, without it, the insurance company

could disavow financial responsibility for claims

of reclassified workers, leaving the employer

with that liability.

Misclassification also can impact the amount of

an employer’s health insurance premiums.

Insurance companies underwrite their policies

based on the number and claims experience of

an employer’s “employees.” If that population

changes due to reclassification, the cost of

health coverage also could change.

Nondiscrimination Testing

The data that an employer uses to perform

nondiscrimination testing for self-funded health

plans and cafeteria plans does not include

independent contractors. Depending on the size

and attributes of the misclassified group, it is

possible that the testing results could change.

Thus, as part of its overall response to

misclassification, an employer should assess

and possibly re-run prior plan testing


Legally-Required Notices for Employees.

Employers are responsible for providing various

types of health plan notices to their employees

at different stages of the employment cycle. An

employer whose independent contractors are

reclassified as employees must evaluate not

only which notices should have been provided,

but also how to address the prior lack of notice.

For example, an employer must consider the

extent to which COBRA notices or a Summary

of Benefits Coverage required under the ACA

should have been provided, and the impact of

failure to provide those notices at the required

time.

Other General Misclassification Issues

Worker misclassification not only involves

improperly classifying someone as an

independent contractor instead of an employee,

but also improperly classifying an employee as

being exempt from overtime pay and meals and

rest breaks. Both of these worker

misclassification issues are especially present at

the early stages of a company and, if left

unaddressed, the company may be faced with a

much larger problem in the future, such as a

class action lawsuit.

In some instances, a single employee filing a

wage claim with the state may be enough to

prompt an audit of the company by the state

employment department/division. These audits

can be extremely burdensome on the company’s

time and resources and could include a review

of all of the company’s “independent

contractors” and pay practices. In addition, the

IRS may, in turn, conduct a similar audit leading

to a requirement to pay back wages along with

various tax penalties as discussed above.

Global Considerations

In most countries outside of the U.S.,

misclassification risks are equally an issue.

Independent contractors, agency workers, and

even vendor employees are potentially at risk of

reclassification. The big risks are:

claims for equity compensation, especially

for companies that grant broad equity

compensation awards;

claims for discretionary leave benefits, such

as generous parental leave benefits;

the “domino effect” among employee

classes and individual employees. Although

class action is generally not available

outside of the U.S., this area is closely

followed by workers, regulators and

employee representative bodies in most

countries and a successful claim will likely

lead to audits and further claims; and

equal treatment claims from agency

workers. Even if agency workers are not

reclassified as direct employees of the end

user, there is a risk, especially in the

European Union, that they will be able to

claim a right to a wide range of discretionary

benefit programs under “equal treatment”

rights concepts.

Recommendations on Preemptive Steps to

Avoid Misclassification

Employers should consider taking preemptive

steps to avoid worker misclassification issues.

One preemptive measure is to conduct a

privileged examination of the work force to

determine whether contractors are properly

classified and, if necessary, take remedial

action. Employers should also consider setting

up strict requirements for hiring contractors and

be vigilant in meeting those requirements.

Employers may also choose to engage a third

party to screen and hire its contractors, though

the contract with the third party should include a

strong indemnification clause to provide

protection for the employer in the case of

alleged misclassification.


Orrick is a leading global law firm focused on representing companies in the technology, financial and energy sectors.We are committed to long-term strategic relationships with our clients, and are widely recognized for the quality of ourclient results. With 1,100 lawyers based in key markets worldwide, our global platform allows us to meet the needs ofour clients wherever they do business.

We understand that attracting and retaining top talent is critical to your success. Our clients entrust us with their mostimportant talent issues because we solve them. We have the most talented team of experts in our clients’ mostimportant areas. We offer solutions in the areas of Qualified and Non-Qualified Plans, Global Equity & HumanResources, Health and Welfare, Executive Compensation, Employee Benefit Plans in M&A and IPOs and ERISALitigation, among others.

To join our mailing list, visit orrick.com.

Key contacts from our Compensation & Benefits Team

Jonathan M. Ocker

San Francisco

+1 415 773 5595

[email protected]

Juliano Banuelos

San Francisco

+1 415 773 5961

[email protected]

Laura L. Becking

New York

+1 212 506 5113

[email protected]

Nancy Chen

Silicon Valley

+1 650 289 7128

[email protected]

Brett Cooper

San Francisco

+1 415 773 5918

[email protected]

Jason D. Flaherty

San Francisco

+1 415 773 4273

[email protected]

Christine A. McCarthy

Silicon Valley

+1 650 614 7634

[email protected]

Eric C. Wall

San Francisco

+1 415 773 5974

[email protected]

William D. Berry

San Francisco

+1 415 773 5519

[email protected]

Mitchel C. Pahl

New York

+1 212 506 5023

[email protected]

Patricia E. Anglin

San Francisco

+1 415 773 5872

[email protected]

Joyce Chen

New York

+1 212 506 5118

[email protected]

Jeremy D. Erickson

San Francisco

+1 415 773 5862

[email protected]

Michael Y. Yang

Silicon Valley

+1 650 614 7472

[email protected]

Keith A. Tidwell

San Francisco

+1 415 773 5592

[email protected]

Eric Kitcho

Wheeling

+1 304 2312671

[email protected]

Yvonne Nyborg

San Francisco

+1 415 773 5596

[email protected]

Disclaimer

This publication is designed to provide Orrick clients and contacts with information they can use to more effectively manage their businesses and access Orrick’s resources.

The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are rendering legal or other professional advice

or opinions on specific facts or matters. Orrick assumes no liability in connection with the use of this publication.

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