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
