February 22, 2008

IRS Provides More Guidance on Section 162(m) Position

Yesterday, the IRS published Revenue Ruling 2008-13, which provides guidance for identifying performance-based compensation for purposes of Section 162(m) and clarifies some of the open issues from the private letter ruling that I blogged about yesterday.

The ruling provides transition relief for awards with a “performance period” (but really meaning the service period to which the performance goal relates) that begins on or before January 1, 2009, or compensation paid pursuant to an employment agreement in effect today, and while that agreement continues in effect (determined without regard to extensions, including auto-extensions). In other words, the clarifications from this new ruling are (1) they expressly cover retirement now and (2) they give relief for a couple of years – and for existing employment agreements.

The transition period will be helpful – but it may not be as “long” as it sounds. Many contracts have automatic renewal provisions that may limit the transition relief (see the language “without respect to future renewals. . . including. . . automatic) – and the “voluntary retirement” holding will likely cause additional issues for companies. At least there will be some time to “negotiate” required changes with executives. Read more analysis of the ruling in “Melbinger’s Compensation Blog.”

Stay tuned for another program – “The Section 162(m) Workshop” – that will take place next month to help you navigate the many issues that you will now need to consider.

California Supreme Court Dodges Internal Affairs Conflict Issue

Last week, the California Supreme Court issued its opinion in the appeal in Grosset v. Wenaas; I blogged about this case way back in 2005 and we have posted memos regarding this case in our “Internal Affairs Doctrine” Practice Area. From Keith Bishop:

The case involved a shareholder derivative suit and a Delaware corporation (JNI Corporation). The Court of Appeal applied Delaware law because the requirements for standing in a derivative action implicate the “internal affairs” of the corporation. The Court of Appeal also found – in the alternative that California imposed a continuous ownership requirement that was consistent with Delaware law. Accordingly, the shareholder was out of luck and he appealed to the California Supreme Court.

The Supreme Court found that because California and Delaware law have parallel continuous ownership requirements there is no conflict of law. Hence, it was able to avoid discussing the Delaware Supreme Court’s decision in Vantagepoint Venture Partners v. Examen.

The case is important because it sets forth the California Supreme Court’s analysis of California’s shareholder derivative statute, Corporations Code Section 800. However, the opinion leaves unanswered how the California Supreme Court will deal with the internal affairs doctrine when it finds that California and Delaware corporate law are in conflict.

Inside Perspective of Accounting Fraud

In this podcast, Walter Pavlo, a money launderer, and Neil Weinberg, Senior Editor of Forbes, explain how they wrote a book about why someone turns to crime – in this case, the biggest accounting fraud ever (which occurred at MCI), including:

– What is the book about?
– Why did you write the book?
– What has been the most interesting feedback about the book?

– Broc Romanek