*Chairman’s Amendment

The Tax Bill has been amended (the Amendment) by adding H.R. 3084, which was introduced on June 27, 2017 (the “Empowering Employees through Stock Ownership Act”).

The Amendment works to avoid triggering the immediate inclusion of taxable income under proposed Section 409B for stock options and restricted stock units of private companies if an employee makes an election. Under the Amendment, a deferral election is available for “qualified employees” and allows for an “income deferral period” of up to five years after such an employee exercises a vested option or a restricted stock unit becomes vested (the original text of H.R. 3084 proposes a seven-year period). Employees specifically excluded from deferral eligibility include 1% owners, the chief executive officer, the chief financial officer, and for any of the last 10 years, has been one of the four highest compensated officers, as determined by SEC proxy disclosure rules (each an Excluded Employee). The income deferral period would end upon the happening of specified events, such as (i) the stock of the company becoming readily tradable on an established securities market, (ii) the first date the stock becomes transferable (including transferable to the employer), presumably upon a merger with a public company, (iii) the employee revoking the election or (iv) an employee becoming an Excluded Employee.

To further incentivize shared ownership in private companies, the Amendment requires that, effective January 1, 2018, corporations provide stock compensation to at least 80% of its employees with the same rights and privileges to receive qualified stock.

The Amendment has numerous issues that must be resolved including (i) how you define Excluded Employees with reference to an SEC public company standard, (ii) whether a deferral election may be made with respect to vested options that have not been exercised, (iii) how becoming an Excluded Employee after making a deferral election would apply (including the lack of any control that employees would have in this situation) and (iv) how the equal rights and privileges concept would be applied in the context of determining the 80% limit and the applicability of severance and change of control protection that may exist with respect to some employees.

Notwithstanding the forgoing concerns, the Amendment is a step in the right direction for avoiding a severely problematic impact on equity compensation for private companies. However, there is still more needed to alleviate concerns relating to private companies as well as the concerns relating to how Section 409B will be applied to public companies.