Nonlapse restrictions.
Author | Elinsky, Peter I. |
The IRS has ruled that a provision in an employer's restricted stock plan that causes the restriction to lapse on the occurrence of a public offering or change in control does not prohibit the restriction from functioning as a nonlapse restriction, provided the event's occurrence is highly speculative.
In Letter Ruling 9308022, Employer established a supplemental executive retirement plan. Under the plan, Employer's board of directors could grant share awards to officers and key employees (participants). There were two types of share awards: current share awards and deferred share awards.
Current share awards granted participants shares of common stock. Though the participants were not required to pay for these awards, they had to enter into an agreement restricting the shares, i.e., the shares would not be transferable and the participant would sell the common shares to Employer for book value if the participant terminated employment. If there was a public offering or change in Employer's control, the restrictions no longer applied. However, if there was a change of control, the participant would be required to vote with the majority of the common shares.
A deferred share award was an agreement that entitled a participant either to receive or buy shares of common stock at a future date. If a participant had to buy the common shares, the price was set at book value. The right to receive or buy the shares was contingent on continued employment. Prior to the date the participant received or bought the shares, the participant had no voting or other ownership rights in the common shares. The shares, when granted, were subject to the same restrictions as the common shares granted as current share awards.
In general, Sec. 83(a) provides that if property is transferred to a service provider, the excess of (1) the property's fair market value (FMV) (determined without regard to any restriction other than a...
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