The Basics

Representations and warranties insurance (R&W Insurance) protects a party from financial losses resulting from inaccuracies in the representations and warranties made about a target company or business in connection with certain corporate transactions such as mergers and acquisitions. R&W Insurance policies are made up of both buy-side (most common) and sell-side policies.

In a traditional buy-side R&W Insurance policy, the buyer is the insured and the objective is to provide coverage against financial loss suffered as a result of a breach of the seller’s representations and warranties. The parties’ exposure in the case of a breach of the representations and warranties is limited to a relatively low amount referred to as the retention amount. In most R&W Insurance policies, the retention amount is generally equal to between 1–3% of the enterprise value of the transaction. The R&W Insurance policy protects against any exposure in excess of the retention amount and up to a negotiated limit.

Private companies grant stock options to their employees as a way to retain and motivate them and to reward their employees for the company’s success. Included below are five common mistakes we have come across.

Congratulations to Steven P. Johnson on his election to the Morgan Lewis partnership in our employee benefits and executive compensation practice! Effective October 1, 2019, Steve, who is resident in Washington, DC, will join 29 other newly elected partners from 12 offices and nine practices. For information about all of the firm’s newly elected partners, please see Morgan Lewis Elects 30 New Partners.

On April 5, the IRS issued Private Letter Ruling 201911002 where it addressed whether an employer’s stock purchase plan that permits a participant to purchase employer shares via a loan from the employer or a third party qualifies as an employee stock purchase plan under Section 423(b) of the Internal Revenue Code (Code). The plan permits the exercise price to be paid through a salary reduction and/or the proceeds of a loan unless the loan is prohibited by the Sarbanes-Oxley Act of 2002.

Under Section 409A of the Internal Revenue Code, if deferred compensation is paid to a specified employee of a publicly traded company on account of separation from service, the commencement of the payment must be delayed for six months, except in the event of death. The Section 409A regulations set forth the requirements for determining which employees are considered specified employees for this purpose. In general, the list of specified employees is determined on an annual basis on the public company’s “specified employee identification date” (December 31, by default), and that designation takes effect on the next “specified employee effective date” (April 1, by default) and continues for 12 months (i.e., until March 31 of the following year, by default).

Internal Revenue Service Notice 2019-09 gives tax-exempt organizations interim guidance on how to identify covered employees, calculate remuneration, and allocate excise tax under Section 4960. Please see our recent LawFlash on this interim guidance, and reach out to the LawFlash authors or your Morgan Lewis contacts if you have additional questions.

The Internal Revenue Service has issued Notice 2018-68 providing guidance on changes in Code Section 162(m) made by the Tax Cuts and Jobs Act of 2017. The Notice has some good news and some not-so-good news, but on balance is helpful, particularly in continuing to respect state law in identifying a “written binding contract” under the grandfather rules.

To learn more, please read our LawFlash.

Recent SEC enforcement actions highlight the importance of accurate proxy disclosure of perquisites provided to named executive officers.

The SEC proxy disclosure rules require that companies disclose in the Summary Compensation Table of the proxy statement the perquisites provided to a named executive officer if the officer’s total perquisites exceed $10,000. If the value of a single perquisite exceeds the greater of $25,000 or 10% of the total value of all perquisites reported, then the type and amount of such perquisite must be identified in a footnote. See 17 CFR 228.402(c)(2)(ix), Instruction 4.

Director compensation has come out of the shadows and is a focus of shareholders, plaintiffs’ lawyers, and shareholder advisory firms. In the December 2017 Investors Bancorp case, the Delaware Supreme Court refused to apply the deferential “business judgment” standard of review to discretionary director compensation awarded pursuant to a shareholder-approved plan. Instead, the court applied an “entire fairness” standard of review. Shareholder litigation with respect to director compensation has subsequently increased, as evidenced by several recent settlements relating to fiduciary breach claims over director compensation. ISS and Glass Lewis review director compensation closely, and ISS announced this spring that it would consider issuing “withhold” recommendations with respect to directors who approve director compensation when there is a pattern of excess director pay without a compelling rationale or other mitigating factors.

In our June 21 post, we addressed the provisions of Section 507 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). Section 507 directs the US Securities and Exchange Commission (SEC) to amend Rule 701 under the Securities Act of 1933 by increasing—from $5 million to $10 million—the amount of securities that an eligible company can sell under the rule during a 12-month period without being subject to the rule’s enhanced disclosure requirements.

In response to the Act’s mandate, the SEC issued a release, Exempt Offerings Pursuant to Compensatory Arrangements, Securities Act Release No. 33-10520 (July 18, 2018), under which it adopted an amendment to Rule 701(e) to increase the enhanced disclosure threshold from $5 million to $10 million. The amendment became effective on July 23, 2018. If a company commenced an offering during the current 12-month period that was continuing on the effective date of the rule amendment, it can apply the $10 million disclosure threshold to the offering.