Baker's Choice: February 2007

We hope this finds you all healthy, happy and off to a great start in 2007!

In this issue we link you to lots of follow-up info. The newspapers are still full of revelations about stock option backdating, especially as the SEC and the DOJ refine their investigations and companies react to employee lawsuits. Two important cases we discussed in September are now wending their way up the appellate ladder, and we're tracking them for you. New versions of old California employment regulations are on tap. And if, like L&B, your business is located in San Francisco, remember that Our Fair City enacted some extra-special wage and benefit rules for employees in 2007.

• Option backdating: the saga continues. In September, we linked you to for the then-brewing stock option backdating scandal. As everyone knows, the action has continued to percolate. As of mid-February, The Wall Street Journal's "option scorecard" lists 120 companies that have announced investigations by internal audit committees, the DOJ, the SEC or a combination of the three. The SEC continues its vigorous pursuit of both corporations and individuals. But the DOJ is hot on its heels: to date, criminal indictments have been filed against officers at Brocade Communications and Comverse Technology. Meanwhile, at least 30 companies have reported executive resignations as a result of backdating investigations (including Silicon Valley bellwether Apple Computer).


• At the same time, employees have gone to bat for their rights. The main targets have been companies that suspended stock option plan activity due to backdating issues, creating hardship for optionees who had nothing to do with the granting process. One example is McAfee, Inc., which responded to a class action lawsuit by agreeing to extend the post-termination exercise period on options for all employees (current and former) for 30 days after the date that plan activity is re-started. We are aware of a number of other companies that have taken this route (with and without litigation); we think it's the smart way to go. That doesn't mean, of course, that there will be no other employee claims related to this "hidden victims" scenario. Moreover, employees with back-dated options may still be subject to (and need to proactively take steps against) adverse tax consequences. For top executives, the IRS "fix" for 409A tax penalties expired on December 31, 2006. Non-executives have until the end of 2007 to deal with the "discount option" problem, and the IRS has just announced a special program to permit employers to pay taxes on behalf of any such employees who unwittingly exercised discount options in 2006.


• When it comes to case law, it's not over til it's over. Until litigants have exhausted their final appeal, anything can happen. As we noted in September, the California Court of Appeal in Edwards v. Arthur Andersen LLP rejected the Ninth Circuit's "narrow restraint" exception to California's public (and statutory) policy against post-employment noncompete agreements. Everyone expected the California Supreme Court to review this case, and the justices intend to do so this term. Whichever way the Court goes, it will be good for both employers and employees to have this important issue resolved in California. An odder twist has occurred in Murphy v. Internal Revenue Service, the U.S. Court of Appeals decision that held it unconstitutional to tax emotional distress damages arising from an employment law claim. Since that decision came down in August 2006, commentators have eviscerated the court's reasoning. In a surprise response to the criticism, the Murphy court --of its own motion-- vacated the decision on December 22, 2006 and scheduled it for rehearing later in the year. Our suggestion: if you paid taxes on damages received for emotional distress, don't file for a refund any time soon.


• New employment-related legislation effective for 2007: For employers, a number of reminders: first, remember that California's sexual harrassment training requirements come up every two years, so if you last trained supervisors in 2005, you're up against a 2007 retraining deadline. Second, California minimum wage is now $7.50 ($9.14 in San Francisco). Finally, if you have non-union employees in San Francisco don't forget that mandatory paid sick leave went into effect last week on February 5, 2007.


• On the L&B calendar: There's still plenty to be said about the impact of Section 409A on executive compensation. I'll be talking about that, and along with other aspects of negotiating and structuring equity compensation agreements, at the Beyster Institute/NCEO Annual Employee Ownership Conference in San Diego on March 22, 2007. Also, the eighth edition of The Stock Options Book is now available (it's updated to include backdating, of course). Finally, I'm working right now on the 2007 edition of the Law of Equity Compensation, so if you had suggestions or corrections for the 2006 book, please pass them along ASAP.