Often, the directors of private companies have certain rights and benefits that are triggered by a change of control, . B such as the accelerated acquisition of share allocations and payments as part of a management exclusion plan. These payments may result in significant tax penalties under Section 280G of the Internal Revenue Code or the ”Golden Parachute Rules” unless the Company takes appropriate action. Article 280G was enacted by Congress to prevent the payment of significant compensation to corporate executives as ”golden parachutes” in an exit event at the expense of other shareholders. 280G is triggered when an insured person receives payments in the form of compensation as part of a change of control that exceed 3 times their ”base amount”, which is defined as their average annual remuneration over the past five years (prorated for any part-time period). However, once this threshold is multiplied by 3, penalties under the 280G standard apply to ”oversail payments”, i.e. all control switch payments that exceed the simplicity of the base amount. For executives whose total compensation for change is above the threshold, all is not lost. In general, private companies can avoid the application of 280G by obtaining a vote of shareholders approving parachute payments. The vote must be approved by 75% in the interest of all voting shareholders (with the exception of persons receiving parachute payments as part of such a transaction). However, in order to obtain this protection, an officer must first agree that if the shareholders` vote fails, he waives any right to a change in control remuneration that exceeds 3 times the threshold.
In addition, if the Company requests a cleansing vote of the shareholders, 280G requires the disclosure of all material facts regarding the change in control of payments to all voting shareholders. Payments made after the end of the transaction, . B such as a deductible bonus or segregation compensation, are usually also subject to 280G. Again, amounts paid by the surviving buyer or company after closing may be excluded from the 280G analysis to the extent that such payments constitute reasonable compensation for services provided after completion. Payments made to an individual by a target company before or at the time of closing may include transaction bonuses (including payments under an executive exclusion plan), severance pay, and the value of the accelerated option acquisition and limited stock allocations. 280G also assumes that any payment made to an AIFM concerned under an agreement concluded within one year before a change of control will be made as part of the change of control. However, payments are excluded to the extent that they can be proven as appropriate compensation for services rendered. Parachute overpayments are subject to an additional excise duty of 20% for the recipient (in addition to the normal tax rates that otherwise apply). In addition, the amounts paid to the person are not deductible by the paying company. This article is intended to give a brief introduction to the payment rules for the golden parachute. Since 280G rules can be somewhat complex and technical, it is advisable to analyze the possible effects of 280G early in a potential mergers and acquisitions transaction.
In general, 280G applies to officers, highly remunerated persons and 1% of the shareholders of a C company undergoing a change of control. 280G generally does not apply to corporations organized as an LLC or S corporation, nor to Company C, which may be treated as an S Corporation. For more information, please contact Dave Czarnecki. .