Section 280G
The “golden parachute” rules of Sections 280G and 4999 come into play for certain individuals that receive compensation in connection with the transaction that equals or exceeds three times the individual’s average compensation for the portion of the past five years that they have worked for the corporation. Those payments characterized as “golden parachute payments” are subject to a 20% excise tax and the target corporation is denied a deduction for such payments. Which individuals the provisions apply to, how is compensation determined, and what is considered average compensation is all subject to the vagaries of the Section 280G regulations.
The goal of any transaction is to avoid the characterization of any payments as golden parachute payments and there are a number of ways to do that.
First, you can avoid the provisions being applicable to the target. Partnerships, S corporations, and certain closely-held C corporations are all exempt from the provisions.
Second, you can exclude any amounts from compensation that are explicitly approved by a private company target’s shareholders. There are generally two problems that arise here:
The recipient of the payment has to be willing to waive all rights to the payments unless more than 75% of the target company’s shareholders approve of the payments.
The recipient of the payment has to be willing to disclose to all of the target company’s shareholders exactly how much compensation they are receiving in the transaction.
Third, you can reduce the amount of the payment made to a recipient that is treated as made in connection with a change of control, generally by requiring that a non-compete with significant value be granted in exchange for a payment.
Here at Acta, we have years of experience dealing with Section 280G issues ranging from valuations to disclosures, to calculations. For any C corporation undergoing a change in control, our professionals can help you work through the Section 280G analysis, whether it’s analyzing the potential individuals subject to Section 280G, calculating amounts for a shareholder vote disclosure, or structuring transactions in a way that minimizes the economic risk assumed by an executive from a waiver.
