Table of Contents
I. History 10-5
II. SEC Rules and Regulations 10-8
III. SEC Staff Guidance 10-9
a. Compliance and Disclosure Interpretations 10-9
1. Disability Plans That Do Not Discriminate 10-9
2. Accrue Amounts When Due 10-10
3. Calculate Accelerated Options Using “Spread” 10-10
4. No Omission If Executives Receive Amounts Greater Than Employees 10-11
5. Calculating the Value of Life Insurance Benefits 10-11
6. Quantification Date for Tax Gross-Ups 10-11
7. Trigger Date After Fiscal Year End 10-12
8. Can’t Limit Disclosure to Specific Triggering Event 10-12
b. Comment Letters 10-12
- Relationship to the CD&A 10-13
- Narrative Disclosure Under Item 402(j) 10-13
- Tables 10-13
- Terminology 10-13
- Triggers 10-13
- Amounts Payable 10-13
- Totals 10-13
IV. How the Rule Works 10-14
a. General 10-14
- Many—and Varied—Post-Employment Compensation Arrangements 10-14
- Investors Targeting Post-Employment Compensation Arrangements 10-14
- Rethinking Purpose of Post-Employment Compensation Arrangements 10-14
- Five Different Locations to Disclose Post-Employment Compensation Arrangements 10-15
- Trend Towards Tabular Format 10-15
- Complexity of Tables 10-15
- Principles-Based Disclosure 10-15
- Calculating Amounts 10-16
- No De Minimis Threshold for Disclosure 10-16
- Disclosure of Full “Walk-Away” Totals 10-16
- Time Consuming & Complex Disclosure 10-16
- Narrative Disclosure for Smaller Reporting Companies & EGCs 10-17
b. NEOs 10-17
- Identifying the NEOs to Which Disclosure Relates. 10-17
- NEO Departure Before End of Year 10-17
- NEO Departure After End of Year 10-17
c. Reportable Arrangements 10-18
- Reportable Arrangements 10-18
- Covered Agreements 10-18
- Amounts Covered 10-18
- Include Unwritten Policies & Arrangements 10-19
- Plans That Do Not Discriminate Among Employees 10-19
- Form & Duration of Payments; Identity of Obligor 10-19
d. Triggering Events 10-19
- Types of Triggering Events 10-19
- Change in Responsibilities 10-20
- Definition of Change-in-Control 10-20
- Dates Presumed for Triggering Dates 10-20
- Disclosure of Trigger Details 10-20
e. Estimated Payments 10-20
- Quantifying “Reasonable” Estimates 10-20
- Estimates vs. Actual Numbers 10-20
f. Determination of Appropriate Payment & Benefit Levels 10-21
- How Payment & Benefit Levels are Determined 10-21
g. Calculations for Specific Events 10-21
- Calculating Healthcare Benefits 10-21
- Calculating Perquisites & Other Personal Benefits 10-21
- Calculating Value of Equity Acceleration 10-21
- Extending Term of Stock Options 10-22
- Calculating Value of Life Insurance Benefits 10-22
- Retirement Benefits & Nonqualified Deferred Compensation 10-23
- Gross-Ups & Other Tax Reimbursements 10-23
h. Material Conditions or Obligations 10-24
- Applicable Material Conditions or Obligations 10-24
- Whistleblower Enforcement Actions 10-24
i. Other Material Factors 10-24
- “Any Other Material Factors” 10-24
V. Common Questions and Our Analysis 10-25
a. General 10-25
1. Cross-References from Pension Benefits Table 10-25
2. No Confidential Treatment 10-25
3. Item 402(j) Equivalent for Smaller Reporting Companies 10-26
4. Both Acquiror & Target Are Public Companies 10-26
b. NEOs Covered 10-28
1. NEOs Employed by Non-Reporting Subsidiary 10-28
c. Reportable Agreements 10-28
1. Disclosing Acceleration Agreement with a “Single Trigger” 10-28
2. Consulting Agreement for Fired NEO 10-28
3. Non-Compete Agreement for Terminated NEOs 10-29
4. Adopting Severance Plan After Fiscal Year-End 10-29
5. Replacement of Severance Benefit Plan 10-29
6. Termination of NEO After Fiscal Year-End 10-30
7. Termination of NEO After Fiscal Year-End with New Severance Agreement 10-31
8. Reportable Agreements in Annual/Merger Proxy Statement 10-32
9. Disclosure for Non-Retirement Eligible NEO 10-33
10. “Generally Available” Exclusion & Stock Option Plans 10-34
11. “Generally Available” Exclusion & Foreign Employees 10-35
12. “Generally Available” Exclusion & Plan Closed to New Employees 10-35
13. “Generally Available” Exclusion & Continuing Health Care Benefits 10-35
14. Extension of Equity Award 10-35
15. Pro-Rated Annual Incentives 10-36
d. Triggering Events 10-36
1. How to Disclose Triggering Event Definitions 10-36
2. Disclosing Agreement with Both Single & Double Triggers 10-36
3. Disclose Adoption of Double-Trigger Even If Not Required 10-37
4. Severance as Triggering Event 10-37
5. Change in Responsibilities 10-37
6. Trigger Event Occurs At Fiscal Year-End 10-38
e. Valuation Methods/Estimated Payments 10-38
1. Total “Walk-Away” Numbers 10-38
2. Incremental Cost Valuation 10-38
3. Uncertainty of Estimated Payments 10-39
4. Valuing Discriminatory Plans/Benefits 10-40
f. Calculation for Specific Events 10-40
1. Last Business Day of Fiscal Year for Gross-Up Calculations 10-40
2. Valuing Acceleration of In-the-Money Options 10-41
3. Valuing Acceleration of Underwater Options 10-41
4. Contingent Acceleration of Options 10-41
5. Annual vs. Lump Sum Disclosure of Lifetime Payments 10-42
6. Accelerated Equity 10-43
7. Benefit Enhancement 10-44
8. Handling “Eve of Merger” Bonuses 10-44
VI. Practice Pointers 10-45
- Use Table to Supplement Narrative Explanation of Benefits/Assumptions 10-45
- Cross-Reference CD&A Discussion of Post-Employment Arrangements 10-45
- Disclose Definitions/Material Assumptions & Conditions for Triggers 10-45
- Disclose Maximum Cost Estimates for Tax Gross-Ups 10-45
VII. Sample Disclosures 10-45
a. Energizer’s Post-Employment Compensation Disclosure 10-45
b. Costco’s Accelerated Equity Awards Disclosure 10-46
c. Humana’s “Walk-Away” Numbers 10-48
d. Sycamore Networks’ “Single Trigger” Change in Control Table 10-57
e. Starbucks Corporation’s “Walk-Away” Numbers 10-60
f. Spherion Corporation’s Tabular Disclosure 10-63
g. Pall Corporation’s Section 280G Assumptions Disclosure 10-66
VIII. Full “Walk-Away” Values 10-69
- Wealth Accumulation—And Full “Walk Away:” What You Need to Know— And Do 10-69
- What is a Wealth Accumulation Analysis? 10-70
- Why a Wealth Accumulation Analysis Is Important 10-70
- How to Implement a Wealth Accumulation Analysis 10-71
- A Full Blown Chart 10-72
- Compare Against Wealth Created for Shareholders 10-72
- A Few Additional Pointers 10-72
IX. Reconsidering the “Need” for Severance & Change-in-Control Arrangements 10-78
- Don’t Necessarily Rely on “Experts” 10-79
- Leading By Example: The True Leaders Speak Up 10-79
X. Negotiating the Removal of Tax Gross-Ups 10-80
- What is a Tax Gross-Up 10-80
- Reasons for Tax Gross-Ups 10-81
- How to Negotiate Your Way Out of an Unreasonable Gross-Up 10-81
