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Just what the market needs is a little time to sort out unclear rules and to
speculate on which ones might stick. Pushing back compliance of 409A helps
from a tax standpoint on an issue that is quite frankly not much of a tax
issue. While the "potential" tax exposure is "clear as mud" according to the
proposed regulations, the larger issues appear on the audit and transaction
side for companies with significant option plans. On the audit side, key
inputs to calculating the option expense on the income statement under SFAS
123R are the price at which the option is granted and the current strike
price of the stock, both obviously are outputs of the original and current
409A valuations. On the transaction side, the issue remains foggy from a tax
exposure side for both the SEC and a potential acquirer. Pushing back
compliance, I believe actually works against private companies considering a
near term exit. Uncertain rules lead to higher exposure and attention during
the S-1 process from both an accounting and potential tax liability
standpoint, as has been evidenced by the SEC's attention to option pricing
this past year. From an M&A perspective, a poorly priced option plan with
uncertain rules tilts the scale of power to the buyer and may cause sellers
to indemnify an uncertain outcome, which could result in uncertain exposure.
In the end, par for the course as practicality and IRS regulations appear to
be oil and water.

Category(s): IRC 409A
Posted by Brett Suchor at 02:36 PM | Permalink | Comments (0) | TrackBacks (0)