Section 16 (b) of the 1934 Securities Exchange Act

Presently Equity Compensation granted to top executives of major and smaller Corporations is by far the major element of  the total payments to these executives.

The forms of such compensation are Employee Stock Options, SARs, Restricted Stock, Restricted Stock Units, and Performance shares. Very few of the grants are vested upon the day of grants and are usually vested within 1-4 years after the grants.

Taxes generally become due when the granted compensation vests not when granted. Although, the vesting of ESOs and SARs does not cause an immediate tax. Here the tax liability occurs when the ESOs or SARs are exercised.

Most equity compensation plans and/or the grant agreements state the terms under which the tax withholding payments are made upon vesting or exercise. The same is the case with payments to the issuer for exercise prices.

Almost every company gives discretion to the issuer or to the grantee as to whether taxes can be paid in the form of cash or in the form of shares received from the vesting or exercise. These plans are designed to allow the top executives to extract additional wealth from the issuers, since the discretion allows unfair use of inside against the issuer.

This unfair use of inside information can be prevented by merely creating a provision taking the discretion away the insider and the issuer by requiring the tax or exercise price payments to be in the form all cash. The issuer alternatively could require 100% of the tax or exercise payments to be in the form of common stock received. The issuer even could require tax and exercise payments to be made in 50% cash and 50% shares.

But the suggested methods of 

1) Requiring 100% cash, or  

2) Requiring 100% in shares or

3) Requiring 50% cash and 50% shares

reduces the unfair trading on inside information and reduces the excessive extraction of wealth from the shareholders by the insiders.

So enforcing Section 16 (b) of the 1934 Act is the only way to stop the widespread extraction of wealth by the executives from the shareholders.

But attorneys representing the insiders violating section 16 (b) are colluding to

stop the enforcement of section 16 (b). In my next article I will name the firms and

the cases.


John Olagues 

Edited Fri, Sep 14, 2018 1:03 PM

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