Law firms collude to stop the enforcement of Section 16 (b) of the 1934 Securities Act

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

Of course IRC 83 c-3 comes into play and may delay the required tax payments if there was a purchase of equity at a price lower than the present price within less than 6 months prior to the normal tax liability time.

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 the companies by merely creating a provision in the grant agreement taking the discretion away from the insider and from the management of the issuer:

The plan can

A) require the tax or exercise price payments to be in the form of cash only or

B) Alternatively, the issuer could require 100% of the tax or exercise payments to be in the form of common stock received, the price of which would be the closing price on the day the tax liability occurs or

C) The issuer even could require tax and exercise payments to be made 50% in cash and 50% in common shares. 

But the suggested methods of

A) Allowing only 100% cash, or

B) Allowing only 100% in shares or

C) Allowing only 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.

Enforcing Section 16 (b) of the 1934 Act is the only way to stop the widespread illegal extraction of wealth by the executives from the shareholders, given that the designers of the plan try to interpret section16 (b) and the relevant SEC Rules to maximize the wealth extraction..

Designers of executive compensation plans seek to allow violations of section 16 (b) by giving  discretion to the insiders as to the form of the payments for taxes and discretion as to the timing of the exercise of ESOs and SARs.

There are just a very few attorneys who try to enforce 16 (b).

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 involved in the collusion.

John Olagues


Edited Wed, Oct 24, 2018 3:59 PM

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