Don't Open the Veil and Invite Piercers
Thought for the day: Do something to ensure that proper governance practices are followed to make the risk of "piercing the corporate veil" even more remote.
Thought for the day: Do something to ensure that proper governance practices are followed to make the risk of "piercing the corporate veil" even more remote.
If an accident results in death or serious injury, local district attorneys and other law enforcement officials also will assess the situation to determine if criminally negligent or intentional criminal misconduct was responsible for the incident. Potentially, they can bring criminal charges (such as involuntary manslaughter) against individuals in exceptional cases. The standard of conduct would not be expected to be met by officers and directors of a company unless they had actual knowledge of intentional wrongdoing or directly caused a dangerous situation.
The injured person might assess the situation to determine if civil negligence or intentional wrongdoing was responsible for the incident. Injured persons or heirs can bring civil charges (such as negligence) against individuals in many cases.
Employees and officers can be held personally liable and possibly face prison sentences, not only for their own actions, but also for actions of their employees who participate in a criminal activity. The stakes are high in white collar criminal matters. Not too mention that your company can be subject to severe penalties such as fines, disgorgement, and onerous remedial and compliance requirements, too.
These are a few examples:
For example, misleading or inaccurate financial statements can evolve into a securities fraud prosecution. Willful violations of securities laws can create criminal exposure for both the company and its officers. These securities laws apply to both private companies as well as publicly traded companies.
These are among the key actions to take:
It is important to conduct a swift and thorough investigation so the company can understand the facts and take appropriate actions to mitigate its potential criminal exposure. The investigation may be complicated by foreign and domestic data privacy laws imposing restrictions on the collection, transfer, or processing of data. Experienced counsel can help you navigate these complex data privacy issues. Counsel can also help you assess your company’s exposure and determine the best response to the situation. If the government has not yet become involved, counsel can help you decide whether to voluntarily disclose the issue to the government.
Because an officer is more directly involved, often an officer's exposure to the company's operating risks will be greater than the exposure of any member of the Board of Directors. The mere fact that officers of companies have come under criminal investigation can hurt the reputation and bottom line of companies and, of course, those officers. A presumption of innocence and a right to due process are not shields from this harm because these harms may be suffered wrongly and unjustly in some unknown percentage of cases. Any persons against whom criminal allegations can be made can be unjustly accused and socially punished pending a final decision. Regulatory enforcement actions and shareholder lawsuits are agonizingly slow when waiting for vindication.
IRC Section 409A applies to officers with "non-qualified deferred compensation plans"--which roughly means it applies to any present legally enforceable right of a service provider (like an officer) to receive payment in a later year of any taxable compensation for services. It is broad, so Section 409A can apply to non-qualified retirement plans, elective deferrals of compensation, severance and separation programs, post-employment benefit payments provided for in an employment termination agreement, stock options, other equity incentive programs, reimbursement arrangements and a variety of other possible items.
All of the tax penalties for Section 409A violations are imposed on the service provider (the officer, key employee or other worker).
No penalties are imposed on the company or other organization making the payments. Thus, while an employer who adopts a deferred compensation plan may seek legal advice concerning its Section 409A compliance, getting things wrong will have major consequences not for the employer but for the officers--who may have had no role in drafting the plan.
What is a Section 409A violation? Section 409A can be violated in one of two general ways. First, it will be violated simply because documentation is not written correctly, which means if a nonqualified deferred compensation plan includes provisions that are inconsistent with the Section 409A rules. Second, Section 409A penalties can be applied if an action is taken concerning the payment of deferred compensation that violates the Section 409A rules, even if such action is inconsistent with the terms of the relevant written plans. Thus, Section 409A requires both “documentary” and “operational” compliance.
The consequences of a Section 409A documentary or operational failure, in either case, are substantial tax penalties for the affected service providers (employees or other workers). First, the nonqualified deferred compensation in question will be fully taxable as soon as the service provider has a vested (nonforfeitable) right to receive it. Second, a 20% additional tax penalty on the value of the nonqualified deferred compensation will be imposed at the same time. In addition, under certain circumstances, an interest charge will be imposed. Generally speaking, in the case of a documentary failure the penalties would be applied to all participants who are affected by the provision in question. If an operational failure occurs, only the service provider to whom the operational failure relates will be penalized. Once an operational violation occurs, however, penalties are imposed not only with respect to the item of deferred compensation that violated the rules, but also on all similar nonqualified deferred compensation rights. “Similar” means rights under deferred compensation plans of a like type. Plans are divided into eight types: elective account balance plans, nonelective account balance plans, nonaccount balance (such as defined benefit) plans, separation pay plans, split-dollar insurance plans, in-kind benefit and reimbursement plans, stock rights and foreign plans. Thus, for example, if an operational violation occurs with respect to a service provider’s rights under a particular nonelective account balance plan, the penalties will be imposed on all nonelective account balance rights that the participant has with the same service recipient (employer), even if the other plans do not violate Section 409A. As a result of this sweeping aggregation rule, a Section 409A operational violation that seems to affect only a small amount could produce enormous penalties for the officer.
IRC Section 4999 is relevant to you only if you
And, only if the above is true in your case, then IRC Section 4999 can apply if and only if further
Could your employment agreement or any other bonus, termination or retirement arrangement provide for a severance or other bonus payment that is connected to a change-in-control that could exceed three times your base salary?
The Golden Parachute Rules, Section 280G and Section 4999 of the Internal Revenue Code (IRC) were enacted by Congress in 1984. IRC Section 280G denies a tax deduction to corporations for parachute payments made to disqualified individuals that exceed a specified amount. In addition, IRC Section 4999 imposes on the recipient a nondeductible 20% federal excise tax (which is in addition to regular income taxes) on these payments.
In general, parachute payments are compensation payments:
The Golden Parachute Penalties generally do not apply if a disqualified individual’s parachute payments are less than the safe harbor amount of three times the individual’s base amount (the base amount is the average annual taxable compensation for the five years preceding the year of the change in control).
If the aggregate payments exceed the Section 280G/Section 4999 safe harbor, then all amounts in excess of one times the individual’s base amount are generally excess parachute payments subject to the Golden Parachute Penalties.
Exceeding the safe-harbor amount results in adding the non-deductible Section 4999 excise taxes onto the income taxes.
Before excise taxes, the income taxes are usually forty or fifty percent. If the executive safely received one mil less than the safe-harbor limit (equal to three times the base amount), then net of income taxes, the executive could retain about 150% to 180% times the base amount after income taxes. However if the payments to executive exceed the safe-harbor of three times the base amount, a non-deductible excise tax of 20% is imposed on the excess over one times the base amount.
An executive receiving payments of an amount exactly equal to one mil over three times the base amount would be almost exactly two times the base amount over the base amount, of course.
Two times the base amount times twenty percent excise tax equals 40% of the base amount. Not being able to deduct this cost would mean that an exec needs to earn income of about double this amount in order to pay both the amount of excise tax and the amount of tax on the earned income.
To just pay the income taxes from taxable income on two times the base amount you would need to earn two times 40%, or 80%, times the base amount or two times 50%, or 100%, depending on your individual situation.
Adding up those factors, when the executive's payments are just under the safe harbor limit, the executive retains from about 150% to 180% of the base amount after income taxes, and when the executive barely goes over the safe-harbor limit, the executive retains only 70% to 100% times the base amount after income taxes and the IRC Section 4999 excise tax.
That would be like being paid $3.00 and being able to keep only $0.70 or $1.00.
Meanwhile, the corporation cannot deduct the $3.00 payment, so it needs to earn income of about $5.00 to $6.00 to make that payment of $0.70 or $1.00.
Have you used the company counsel as a personal legal advisor and perhaps as a personal confidante just to save a few dollars and feel silly for the experience? Sometimes that can cause a career to crash, so you can feel grateful for not encountering that, right?
Need legal advice about your personal interests? You are well advised to be concerned. Your professional and financial futures may be in jeopardy if you make unwise personal choices. You need independent advice relating to business or a line between business and personal. You need to choose one direction. You need to find peace of mind. You need to know the alternatives and the risks before you choose the answers.
Employers are smart when it comes to negotiating compensation. After all, isn't their primary business objective based upon increasing the "bottom line?" Your employer probably has an attorney, possibly in the foreground, to be sure that the terms of your deal are negotiated in its favor. You may even know the employer's attorney, and you may feel it would be difficult to negotiate on your own behalf.
In today's business climate, executives are advancing their careers more rapidly and earning more than ever before. They probably transition from one organization to another more than five times before they retire. Each time they make a transition, their future earnings and reputation are at stake.
D&O insurance is indispensable for publicly-traded companies. Too many private company officials find out the hard way because, they believe, they are unlikely to ever have a D&O lawsuit. Before a claim arrives from a shareholder or other third-party, it is easy to think that there would never be a claim. When they recognize they need insurance, it is too late.
Improper record keeping can cause problems with the IRS, hamper your ability to raise equity capital and could result in personal liability by “piercing the corporate veil” of the company.
Intellectual property (patents, trademarks, confidential information, know-how) is often vital to success and building value of the company. To protect yourself, obtain appropriate registrations and licenses.
Contracts and leases presented by banks, landlords, suppliers generally are written in their favor. These are negotiable! Review all contracts carefully and ensure they meet your business needs.
Many contracts may require your guaranty. Your guaranties to banks, landlords, suppliers and others may expose you to a much greater personal liability. Where possible, try to avoid personal guaranties.
A competent attorney can help you handle all of these issues, save you time and enable you to focus on the areas vital to business success.
If there is any chance of being asked by the press for your comment on a matter that affects your company, you may want to understand exactly what should be expected from you and why.
You can be honest that you are not the company's spokesperson and not familiar with the name of the company's relevant spokesperson, assuming there is a suit.
Refer questions to a designated spokesperson for the matter, if you know it. The rest of the time, do not comment. Although you can be honest that you are not the company's spokesperson and not familiar with the name of the company's relevant spokesperson, assuming there is a suit.
Having no comment is unobjectionable. You also must always assume that there is or will be someone specifically instructed by the company to address press, media, the Web, investor, and other inquiries of all kinds, and that no one else can comment for the company except a person specifically designated by the company.
Even if the company is slow to name a person, you would owe the company a duty to protect its right to later name a person to address press and media on this subject.
Moreover, you must never forget that your personal opinions should not be volunteered. Officers have a duty to protect the company, including its right to defend itself and to seek confidential advice and opinions from attorneys before offering information. That includes the obligation to prudently remain silent pending that advice being obtained and thereupon digested and understood.
You should only make comments to the press about your company if it is within your job description, and/or when explicitly and specifically advised to do so by a lawyer for the company and/or when specifically advised to do so by an attorney you independently engage to represent you.
Truly, executives do have a duty to protect their company, and the duty they have can be fully and faithfully discharged by bringing the suit to their competent legal counsel's immediate attention. When asked by the press for an impromptu comment, the executive should remain silent and withhold any comment. After the company reviews the complaint, learns the facts and receives the legal advice it should want, it will surely designate someone for commenting to the press.
The duties are called the fiduciary duties. They are very high standards, but even a fiduciary is entitled to fully rely upon experts like legal counsel within the area of their expertise, like responding to a suit.
Hiding the case from its own legal counsel of course would spell disaster, but being publicly open and providing comments or a "play-by-play" to the press is simply not required or advisable or customary, especially for defendants. In fact it can be seriously deleterious to a company's due process rights and could justify a termination for cause or at least a strong admonishment and retraining of the executive.
Any statement made to the public or to any party other than the aggrieved, or any statement made to an aggrieved party that is not explicitly and provably part of a settlement negotiation, can and will be used against the company during trial and, if would follow logically, against the executive, too. This is why you frequently hear, "We cannot comment on pending litigation" from defendants involved in a lawsuit. Statements of opinion by the defendant (which cannot be introduced at trial absent some good reason) cannot help.
Everyone who is not designated as the spokesperson should defer to the company's designated spokesperson to make statements to press, media, or other interested persons.
Discrimination cases are brought frequently by whistleblowers against executives. Whistleblowers may claim that the executive discriminated against that whistleblower. Every executive needs a good understanding, but often executives do not have a good understanding, of key employment laws in the area of discrimination suits. Discrimination is never permitted against protected persons, which now includes new classes such as whistleblowers. The Sarbanes-Oxley Act makes whistleblowers a protected class. In cases of disparaging or changing the working conditions of a whistleblower, the risk exposure would be enormous to the officer individually.
In such cases, exposure to unindemnifiable personal risks and liabilities can be unlimited. Indemnity cannot be paid if paying indemnification would violate so-called "Public Policy" which would mean that an individual would not receive indemnification if it's against public policy for the company to pay indemnification or reimbursement. It is against public policy, obviously, to compensate any wrongdoer, aider, or abettor, for wrongdoing. The company could be powerless to pay any indemnification.
An insurer could agree to pay the unindemnifiable amounts. Nonetheless, insurance carriers would have a complete defense to paying any claims to the extent they constitute fines or penalties. To be sure of this, you can look inside the exclusions section of most insurance policies.
To qualify as a deductible business expense, various requirements must be met, and one requirement is that the expense cannot be a fine or a penalty imposed upon wrongful conduct by a legal authority under applicable law. Paying unlimited expenses without any indemnification and without any tax deductibility would be a crushing burden. The actual amount of gross earnings before tax that one would need to earn to pay a non-deductible expense is estimated at about 200% of the nominal amount of the unindemnified cost in order to both pay the fines and pay the taxes on the earnings.
See all of the Federal Protected Classes, which are provided also separately in California law in ways that do vary from Federal law in some respects.
In California, all of the following are also additional state-only protected classes.
People think they are protected personally by the corporate veil when it comes to anything they do on the job, but that’s not the case.
For instance, unhappy employees have a long list of possible claims against an employer. Depending upon the state law involved or the federal law they may choose, employees can bring claims that an employer discriminated based on age, race, national origin, sex, sexual orientation, or other listed factors. Executives, supervisors and human resource employees have been held personally liable on theories like failure to pay wages or overtime, failure to allow unpaid leave, failure to make pension contributions, wrongful termination, wrongful hiring, infliction of emotional distress, defamation, failure to deposit withholding taxes, and it is very worrisome to realize that certain individuals can be held personally liable on many of these and other types of potential claims.
If indemnity is not maximal, the executive could be left bearing substantial unindemnified costs and risks of loss.
An executive should be familiar with the company's insurance coverage, and the Employment Practices Liability (EPL) Insurance may be more important than the Directors' and Officers' (D&O) insurance.
To help you to look objectively at this list, we refer to the executive to be hired in the third-person as the "person".
Is this person receiving the benefits, bonus programs, insurance, and other terms of employment, being received by the so-called Executives?
Is this person promised the future benefits on par with future benefits that may be received?
Is the bonus guaranteed, dependent on achievement of milestones, or wholly discretionary with the Board of Directors? What provisions are made in case it is earned but cannot be paid by the employer in full due to financial insolvency?
Equity grants are often an important part of the Employment Agreement, and key issues here include:
The issues regarding the right to the employee getting reimbursement expenses include:
The scope of the employment and responsibilities raise a number of issues:
The employer will want confidentiality provisions in the Employment Agreement:
Does the employee have a right to terminate at any time upon giving written notice? What are the effects of a voluntary termination?
Under a contract for a specified term (as distinguished from a contract terminable at-will), does the company waive any claim of damage resulting from the future need to replace the person for the balance of the employment term after voluntary termination?
The circumstances when the employee’s employment can be terminated and the resulting consequences will raise the following issues:
Companies expect that any inventions or business ideas developed by the employee related to the company’s business during the employment period, will be owned by the company:
The Employment Agreement can address various limitations on the employee post-termination of employment:
Most Employment Agreements have multiple provisions dealing with disputes between the company and the employee:
Good employment agreements have a series of “miscellaneous” clauses including those that address these issues:
When executives or other high-level employees or key employees separate themselves from a previous employment arrangement, there are many potential issues on the table that are different from other employer/employee concerns. Typically, the consequences of bad decisions could be serious.
An executive, by the very nature of their position, possess and are privy to information that can be arguably categorized as sensitive trade secrets. Whether contemplating a career move to a competitor or industry partner or weighing the options of establishing their own enterprise, an executive should be mindful of many factors, including:
Just as when the employment relationship was entered into, the first concern is what the contract says. The executive who is on their way out needs to be assured:
Litigation should clearly be an executive’s last option to resolve disputes, but, in some few cases, there are no other options.