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The Employee Ownership Update

Corey Rosen

November 15, 2007

(Corey Rosen)

Nominate a Company—or Your Company—for the Wall Street Journal Winning Workplaces Award

This year, 7 of the 15 winners of the Wall Street Journal Winning Workplaces awards were employee ownership companies. The awards go to companies with 500 or fewer employees "that foster teamwork, flexibility, high productivity and innovation while also treating their employees with respect and providing benefits, both traditional and nontraditional, that make the employee experience better." Nominations are due by February 1 and are easy to compile. You can nominate your own company or another company. Winners are announced in a special edition of the Wall Street Journal and receive considerable additional national attention."

SEC Looking at 10b5-1 Plans

The Securities and Exchange Commission is looking at 10b5-1 plans, plans that allow insiders holding equity incentives in their company to sell their stock on a prearranged schedule. The plans can exempt the insiders from blackout periods on trading because of insider knowledge. The plans must be written and set up in advance of the insiders having any information that might be relevant. A study by Alan Jagolinzer of Stanford found that executives using 10b5-1 plans had abnormal returns 4.1 to 7.4 percent above what would have been expected. One way that could happen is if executives manipulate the release of earnings reports to be fortuitously timed with sales and purchases.

Final 415 Regulations Contain a Few Surprises

In April, the IRS issued final regulations under Section 415 of the Internal Revenue Code, which places limits on annual additions to defined contribution plans. Generally, the regulations simply codify existing requirements, but they also made some changes worth noting. First, the definition of annual compensation has been clarified to include post-severance payments paid within 2 1/2 months following severance or the end of the limitation year. Regular pay, overtime, bonuses, commissions, etc., must be counted, but other forms of payments, such as for accrued sick leave or military service, are optional. Other types of severance pay, including parachute payments, deferred compensation triggered by severance, and severance pay itself, are not included. In a significant change, the rules state that the annual addition dollar amount must be prorated if the plan is terminated before the end of the limitation year.

California Revises Securities Requirements for Equity Compensation

Traditionally, California has had the nation's strictest rules for the issuance of equity awards in closely held companies. Among other rules, awards had to be issued at not less than 85% of fair market value, vesting for non-management employees had to be at least 20% per year over a five-year period from the grant date, there were specific repurchase requirements for shares bought back from employees, there was a 30% limit on the amount of equity that could be issued unless there was a two-thirds vote of shareholders to approve more, and shareholders had to approve a plan within 12 months of the plan's adoption (as opposed to the issuance of awards, as is the case in federal rules).

In July, California changed these rules to make them more consistent with federal rules, particularly the exemptions from registration requirements under Rule 701 under the Securities Act of 1933.

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