A Phantom Menace for IPO Companies - US Tax Regulations Restrict the Use of Restricted Stock Units

April 17, 2015

Section 162(m) of the Internal Revenue Code (“Section 162(m)”) provides for a $1 million dollar limitation on the amount of compensation paid to each of certain named executive officers that public companies may deduct in any year, unless an exception applies. One of the regulatory transitional rules (the "IPO Transition Rule") provides that, in the case of a company that becomes subject to Section 162(m) as the result of an IPO, compensation paid pursuant to a plan or agreement that existed before the IPO and was disclosed to shareholders in connection with the IPO in compliance with applicable securities laws will not be subject to the $1 million dollar deduction limitation for a transition period. This transition period can last until the first shareholder meeting at which directors are elected that occurs in the fourth year following the IPO.

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