December 28, 2005

And Even More on the Internal Affairs Doctrine

Following up on several recent blogs, here is another recent internal affairs doctrine case: Grosset v. Wenaas. This October opinion was issued by the same division of the California Court of Appeal that issued the opinion in Friese v. Superior Court. However, only one of the three justices (McDonald) was involved in both opinions.

The Grosset decision tackles the question of: whether Delaware or California law applies to the question of standing to maintain a derivative suit by a stockholder of a Delaware corporation that was headquartered in California. The Court applied Delaware law, citing with approval the Delaware Supreme Court’s decision in VantagePoint v. Examen. The losing plaintiff has petitioned for a review by the California Supreme Court.

If the Supreme Court does grant the review, the opinion of the Court of Appeal will not be considered published (per Rule 976(d)(1), Cal. Rules of Court). Generally, the Supreme Court has 60 days to decide whether to grant review. Thanks to Keith Bishop once again!

Happy Holidays – and One More Thing on 409A

From Mike Melbinger’s Compensation Blog: “On December 21, President Bush signed The Gulf Opportunity Zone Act (H.R. 4440). Although primarily a package of tax incentives and relief measures for individuals and businesses in the gulf region affected by hurricanes Rita and Wilma, the bill also contains revisions to the Code Section 409A rules pertaining to foreign rabbi trusts.

Section 409A(b) imposes immediate taxation, the 20% penalty and interest if deferred compensation accrues in a “foreign-situs” trust or other arrangement that the IRS deems equivalent to such a trust, even if the assets are subject to the claims of the employer’s creditors (with an exception if all employees perform “substantially all” services related to such deferred compensation in the jurisdiction of the trust). Even if the underlying plan terms otherwise conform to the requirements of Section 409A, holding assets in a foreign trust results in immediate taxation and penalties unless the exception applies.

The effect of this change is to eliminate any grandfather relief for amounts accrued prior to December 31, 2004. If you have a foreign situs trust for non-qualified plan asets, you need to act ASAP to avoid taxation. Ho, ho , ho.

Five Gap Executives to Exchange Stock Options

Speaking of 409A, it looks like The Gap recently made an option exchange in reaction to its application. Here is an excerpt from Saturday’s LA Times” “Gap Inc. said Friday that Chief Executive Paul Pressler and four other executives had accepted the retailer’s offer to exchange their stock options for ones that will result in lower taxes for the employees. As part of the swap, Gap will pay the five as much as $10.1 million.

In a regulatory filing, Gap said it was making the payments and replacing the old stock options because of tax rules adopted since the San Francisco-based company negotiated compensation packages for Pressler and the other executives. Stock options give the holder the right to buy or sell shares at a specified price by a set date.

To lure Pressler from his position as head of the theme park division at Walt Disney Co. in 2002, Gap gave him 1.1 million stock options priced at $5.92 a share, well below the stock’s market value at that time. Under the new tax rules, the executives would have incurred an immediate tax liability on the difference between the exercise price and market price, plus an additional 20% tax on that unrealized income.

To reduce the tax hit, Pressler’s stock options will be replaced with another batch of 1.1 million options carrying an exercise price of $11.83 a share — a price at or above Gap’s market value on the day of his hiring, the company said.

Gap compensated Pressler for the loss of the lower-priced options by paying him $2.36 million this year and as much as $4.14 million in the future.

The total payment of $6.5 million translates into $5.91 a share, the difference between the exercise prices of Pressler’s old and new options.”

On the NASPP’s website, there are hordes of memos regarding what you should be thinking about now to deal with 409A consequences, including option strategies.

Holiday Hijinks

My wife sent me this short video that spoofs “The Chronicles of Narnia.” It didn’t quite send me over the edge – but reminded me of my recent 15 seconds of fame when I was on the local news for a “man on the street” piece when Narnia opened. I was asked to comment on the religious undertones of the movie – before I even went in to watch it with my kids. I said there might be some, but that wasn’t why I went to see the movie. Apparently that was sophisticated enough for the network news…