Election season is over and with the a Republican president and majority in Congress, new questions are emerging about what changes may occur in the coming year. Are you wondering how a new administration may impact stock compensation? Read more in today’s blog to find out.

Repeal of Dodd-Frank?

The day after the election, Cydney Posner of Cooley posted a blog (“Undo Dodd-Frank?” – November 9, 2016) that explored the possibility that certain aspects of Dodd-Frank could be on the table for repeal when the new government is in session/post inauguration. Keep an eye out for a variation of the Financial Choice Act to find its way back to Congress. Posner describes the Act as:

“The bill, sponsored by Jeb Hensarling, Chair of the House Financial Services Committee, was framed as a Republican proposal to reform the financial regulatory system necessary to undo the burdens of Dodd-Frank, which were characterized as a distraction from the SEC’s basic statutory responsibilities. In addition to taking aim at much of Dodd-Frank, among other things, the bill places a heavier burden on proxy advisory firms, regulators and regulations generally and eases some other regulations. Although the bill was never expected to make much progress this year, the NYT suggested that the bill may “help shape the Republican agenda in the next term.” The bill’s chances of becoming law have, well,… to say that they have substantially improved doesn’t quite do the situation justice.”

Aspects of the bill that may impact stock compensation include repeal of the CEO pay ratio disclosure rules, which are not even implemented yet. It’s unclear where this bill will go or how it may be re-introduced, but it certainly is something to keep on the radar.

Tax Rates

President-elect Trump made tax reform a cornerstone of his campaign platform, and his tax plan identified several changes, one of which was a reduction of the top Federal tax rate from 39.6% to 33%. Republican members of Congress also have drafted similar proposals. Most information that I’ve come across in the days post election suggests that tax reforms is not an “if” what rather a “when” and “what” scenario, with good potential for the changes to be significant. What that means in terms of the details is to be determined, but change is likely.

Congress doesn’t reconvene until early January 2017, and Inauguration Day is January 20, 2017, so nothing will happen before then. But I expect it won’t be long after that before we start seeing some of the details around these scenarios to begin to take shape.

-Jenn

This past summer, both the Senate and House of Representatives introduced legislation that seek to defer taxation on some forms of stock compensation issued by private companies. There looks to be some hope of passing at least one of the bills; in today’s blog I’ll catch you up on the topic.

The Proposals

Both the House and Senate bills closely matched in terms of what they proposed in their initial drafts. In September, the House Ways and Means Committee approved the House bill (known as HR 5719, with some proposed amendments), clearing the way for the floor of the House of Representatives to vote on their bill.

Taxes Deferred?

In an attempt to address a longstanding issue with private company stock and stock compensation (illiquidity), the proposed bills represent an opportunity for private company employees vesting in RSUs or exercising non-qualified stock options to defer taxation on those instruments for up to 7 years. Given that many companies of private companies face a hurdle of paying taxes on shares they receive but can’t sell (at exercise for an NQSO and vest for an RSU), this deferral of taxes could be very welcome news, and promote the ability for these employees to more easily exercise their stock options and acquire RSU shares. This could help to underscore the value that many private companies place upon the place of equity vehicles in their compensation programs.

The new legislation, if passed, would essentially amend Section 83 of the Internal Revenue Code to add a subsection.

Hurdles

A memo written by Compensia (“Congress Considers Legislation to Postpone Taxation of Private Company Equity Awards,” September 19, 2016) on the topic evaluates the possible outcomes for the proposals and areas to watch. In particular, of note is that as drafted, the proposals would only defer taxes on grants that were issued in a year when at least 80% of employees received a grant. Per Compensia, “In other words, if a company did not make a broad-based grant in a particular calendar year, none of the awards granted during that year will be eligible for tax deferral.” As Compensia elaborates,

“Further, the bills’ reference to all employees having the “same rights and privileges” is potentially problematic. To the extent that this language is intended to prohibit de minimis awards to some groups of employees, it may present problems for venture-backed companies.

It is also worth noting that the bills are silent on several matters that will be of importance to the granting company and the employees receiving the awards. For example, it is not clear whether the grants or awards must conform to a specific design. Most privately-held companies structure their broad-based equity grants as simple time-based awards. Presumably, these arrangements will continue to be sufficient to ensure that the underlying shares are considered “qualified stock.”

What’s Next?

The House bill, HR 5719, will now make its way to the House of Representatives for consideration. Compensia notes that “while the Senate has yet to act on its version of the bill, with the November election looming, it is possible that these bills could see a final vote before Congress adjourns at the end of the month.”

Stay tuned for developments in this area.

-Jennifer