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In recent years, the level of legal, accounting, and regulatory complexity associated with employee stock options has continued to grow. This book, written by attorneys Alisa Baker and Alison Wright, and writer and editor Pam Chernoff, CEP, presents a straightforward, comprehensive overview of both the big-picture issues and the technical details related to designing and implementing stock option plans and employee stock purchase plans. The book also looks at hot issues and provides illustrative exhibits, a glossary, a bibliography, and primary source materials, plus a seminal article by Corey Rosen on plan design.
The 23rd edition (2023) updates most of the chapters and includes coverage of new regulations implemented under the Dodd-Frank Act governing pay versus performance disclosures and clawback policies.
"Anyone involved with the design or administration of employee stock option programs, from the inexperienced stock plan administrator to the seasoned compensation professional, will appreciate this useful reference tool."
- Tim Sparks, President, Compensia, Inc.
"This book should be on the desk of every stock option professional."
- Robert H. (Buff) Miller, Cooley Godward Kronish LLP
Table of Contents
Part I: Overview of Stock Options and Related Plans
Chapter 1: The Basics of Stock Options
Chapter 2: Tax Treatment of Nonstatutory Stock Options
Chapter 3: Tax Treatment of Incentive Stock Options
Chapter 4: Plan Design and Administration
Chapter 5: Employee Stock Purchase Plans
Chapter 6: Trends in Equity Compensation: An Overview
Part II: Technical Issues
Chapter 7: Financing the Purchase of Stock Options
Chapter 8: Overview of Securities Law Issues
Chapter 9: Tax Law Compliance Issues
Chapter 10: Basic Accounting Issues
Chapter 11: Tax Treatment of Options on Death and Divorce
Chapter 12: Post-Termination Option Issues
Part III: Current Issues
Chapter 13: Legislative and Regulatory Initiatives Related to Stock Options: History and Status
Chapter 14: Cases Affecting Equity Compensation
Chapter 15: Transferable Options
Chapter 16. Evergreens, Repricings, Exchanges, and Reloads
Appendix 1: Designing a Broad-Based Stock Option Plan
Appendix 2: Primary Sources
From Chapter 2, "Tax Treatment of Nonstatutory Stock Options" (footnotes omitted)
An individual service provider who has been granted an NSO will be subject to income tax only at the time the option is exercised, unless Section 409A of the Code applies or the option is exercised before it becomes vested. The amount taxed will be the spread between the exercise price and the fair market value of the stock at time of exercise. As a general rule, the company will be entitled to take a tax deduction in an amount equal to the amount included in income by the optionee, as long as the company reports the income on a Form W-2 or 1099-NEC.
For the optionee, any appreciation in the stock’s fair market value between the exercise date and the sale of the shares acquired upon exercise will be treated as capital gain, which will be long-term if the shares are held for more than one year or short-term if the shares are held for one year or less. If the stock price drops between exercise and sale, the result will be a capital loss. The holding period for capital gain or loss purposes generally begins at the date of exercise (with the narrow exception of stock acquired one-for-one in a stock swap, described in chapter 7). Exhibit 2-1 illustrates the tax consequences to the optionee.
From Chapter 6, "Trends in Equity Compensation: An Overview" (footnotes omitted)
In this context, a clawback is a contractual or statutory right to recover realized equity compensation upon the occurrence of certain events. The Sarbanes-Oxley Act of 2002 authorizes SEC enforcement of forfeiture of compensation by the CEO and CFO in the event of certain securities law violations (e.g., those giving rise to financial restatements, such as backdating). The Dodd-Frank Act broadened the authority of companies to claw back compensation, and in late October 2022, the SEC finalized clawback rules that will lead to implementation of this provision. The new rules broaden the scope of companies’ authority both in terms of when compensation must be clawed back and who it must be clawed back from. The provision will go into effect once the national securities exchanges issue listing standards that follow the SEC regulations. The exchanges have up to a year to add clawback requirements to their corporate governance standards. After that, companies will have 60 days to adopt clawback policies that comply with the rules.
Under the rules, current and former Section 16 officers will be subject to clawback of their incentive compensation when grant or vesting is based on stock price or other financial reporting metrics. This includes performance-vested equity compensation received in the three years leading up to a restatement that results from noncompliance with SEC rules. The error can be either a material error or one that would become material if not corrected.
Because the Dodd-Frank Act does not require that compensation be clawed back solely from those who were involved in the financial misstatements, it potentially has a much broader application than the Sarbanes-Oxley provision. However, in 2016 the Ninth Circuit Court of Appeals took a broader view of the clawback provisions of the Sarbanes-Oxley Act when it upheld the SEC’s argument that Sarbanes-Oxley allows clawbacks from CEOs and CFOs who have certified false and misleading financial statements that are later restated—even if the restatement was not caused by the misconduct of the CEO or CFO.