Surprise, Surprise, Come On Open Your Eyes and Check the Tax Boilerplate and Operating Agreements
by John Ludlum
We have referenced Code Section 280G and the golden parachute rules recently on this blog, and we have also discussed LLC equity incentives. It can be fun to see how these concepts play out in a practical way in executive agreements based on some recent experiences in negotiating terms for executives in connection with private equity acquisitions.
For Code Section 280G, there are basically 3 ways that Section 280G golden parachute terms appear in employment agreements:
- “Gross-ups” for 280G taxes (where the company makes the executive whole for any Code Section 280G taxes imposed),
- “Best-of” provisions (where the executive receives either the total amount of payments and pays the taxes or reduces payments to a level below the threshold where Code Section 280G taxes apply, whichever results in the greatest amount of benefits being paid to the executive), and
- “Haircuts” (where the total amount of Code Section 280G benefits are mandatorily reduced to a level below the threshold where Code Section 280G applies).