Legal & Regulatory Compliance Flashcards

Under the SEC's pay-versus-performance disclosure rules (Item 402(v)), companies must report 'Compensation Actually Paid' (CAP) which differs from SCT total by:

Answer: Adding back pension service costs and deducting equity award grant date fair values, then adding year-end fair values of outstanding awards

CAP adjusts the SCT total by removing pension values and grant date fair values of equity, then adding year-end fair values of outstanding unvested awards and vesting-year fair values of awards that vested.

Which provision of IRC Section 162(m) limits the tax deductibility of executive compensation?

Answer: Compensation over $1 million paid to covered employees is not deductible

IRC Section 162(m) disallows a corporate tax deduction for compensation exceeding $1 million paid to any covered employee (which now permanently includes the CEO, CFO, and the next three highest-paid executives).

A 'blackout period' in equity plan administration refers to:

Answer: A period during which insiders are prohibited from trading company securities

A blackout period is a window — typically around earnings announcements or other material events — during which company policy prohibits insiders from buying or selling company securities.

Under Rule 701, which condition triggers enhanced disclosure requirements for private companies offering securities to employees?

Answer: Sales exceeding $10 million in the 12-month period before the transaction date

Rule 701 requires delivery of additional disclosure (financial statements, risk factors, plan summary) when aggregate sales in the prior 12 months exceed $10 million.

The Employee Retirement Income Security Act (ERISA) applies to equity compensation plans that are characterized as:

Answer: Employee benefit plans providing retirement income or deferring income to termination

ERISA covers employee benefit plans — including pension and profit-sharing plans — but generally does not apply to stock option plans and ESPPs that are not designed to provide retirement income.

Which reporting obligation requires a beneficial owner who crosses the 5% ownership threshold of a public company's shares to file with the SEC within 10 days?

Answer: Schedule 13D or 13G under Section 13(d)

Any person or group acquiring beneficial ownership of more than 5% of a registered class of equity securities must file Schedule 13D (or the shorter 13G for passive investors) within 10 days.

In a corporate merger or acquisition, what typically happens to unvested equity awards under a 'double-trigger' acceleration provision?

Answer: Awards vest only if both a change in control occurs AND the employee is subsequently terminated or constructively dismissed

Double-trigger acceleration requires two events: (1) a change in control and (2) an involuntary termination or resignation for good reason — protecting both employees and acquiring companies from unnecessary windfalls.