1. 1 2006 Employee Ownership Conference April 27, 2006 Minneapolis/St. Paul Equity Compensation Litigation & Enforcement Issues

2. 2 Equity Compensation Litigation Trends: Employment, Bankruptcy, Divorce & Plan Administration Daniel N. Janich Janich Law Group 222 North LaSalle Street Chicago, IL 60601 312.609.4528djanich@janichlawgroup.com

3. 3 Reasons for Increase in Equity Compensation Related Litigation  Prevalence of Equity Compensation in Dot Com Era  Popularity of broad based stock option plans = Rank & File Treatment of equity compensation, especially stock options, as integral part of their company compensation  Trend Toward Adoption of Multi-Tier Equity Compensation Programs In Post Dot Com Era Trend  Availability of Equity & Equity-Like Mix: Stock Options, Restricted Stock, Restricted Stock Units, Performance Shares, etc.

4. 4 Common Scenarios in Equity Compensation Litigation   Employment & Plan Administration  problematic plan drafting and administration  Bankruptcy & Divorce Issues  disputes over rights to ownership

5. 5 Current Equity Compensation Litigation Issues   Employment  Vesting and Exercise Rights  Stock Plan Administration  Change in Control and Exercise Rights  Bankruptcy  Inclusion in Bankruptcy Estate  Divorce   Inclusion in Marital Property or Income

6. 6 Employment Issues  Disputes frequently arise from employment termination  Vesting  Right to Exercise Options  Untimely Exercise

7. 7 Vesting Typical vesting issues: when is employment “terminated” for vesting purposes? when is a grant enforceable?

8. 8 Employment Termination Date At will employment status Conflicts of law Triggering events, such as “merger” or “sale of subsidiary”

9. 9 Recommendations Ȏ Ȏ Identify employment termination date for plan purposes; disclaim change in “at-will” status Ȏ Specify factual circumstances triggering loss of equity rights in plan Ȏ Draft documents consistent with provisions in plan and prior grants Ȏ Draft grant that complies with contractual prerequisites

10. 10 Right to Exercise Options Various equity plans include exercise rights after employment termination or corporate merger Litigation frequently arises from miscommunication as to when exercise deadline is enforceable.

11. 11 Recommendations Verify that separation agreement addresses equity compensation issues Confirm that separation agreement describes employment termination consistent with terms of equity compensation plan

12. 12 Untimely Option Exercise No fiduciary duty to remind terminated employee of deadline to exercise equity compensation award if otherwise clearly disclosed in award agreement Employment termination date should be clearly identified

13. 13 Recommendations Ȏ Ensure no ambiguities in plan definitions and provisions relating to exercise Ȏ Determine effect of collateral documents (i.e., employment agreements, releases, separation & stockholders agreements) upon employment termination date & other exercise rights

14. 14 Plan Administration Issues  Change in Control  Contract Nature of Grants

15. 15 Change in Control  Change in Control  What triggers accelerated vesting?  When is vesting accelerated?

16. 16 Recommendations Avoid ambiguous accelerated vesting or change in control provisions Important operative terms in both award and plan  Exercise caution with black-out periods

17. 17 Contract Nature of Grants/Recommendations ȍ Collateral documents frequently are used to document award ȍ Internal consistency and clarity of documents will ensure trouble free plan administration ȍ Document used to grant award must be sufficiently definite in its terms to be valid and enforceable

18. 18 Bankruptcy Issues ɢ When is an equity award includible in the bankruptcy estate? ɢ How are unvested awards treated in bankruptcy proceedings?

19. 19 Allocation of Equity Award Between Bankruptcy Estate and Debtor ɢ Bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy] case.” 11 U.S.C. 541 ɢ Equity Award is a contractual right, i.e., a legal interest of debtor in property ʚ Fully vested equity award prior to bankruptcy filing is includible property of bankruptcy estate

20. 20 Unvested Awards in Bankruptcy ʚ Equity award that is unvested upon filing becomes property of bankruptcy estate upon vesting ʚ Majority of courts adopt pro-rata approach: comparing extent to which award was earned pre- petition (allocated to bankruptcy estate) with extent to which services are required post-petition (allocated to debtor)

21. 21 Divorce Issues Ȏ Award as Marital Property Ȏ Allocation and Distribution Ȏ Inclusion of Award in Child Support Calculation

22. 22 Marital Property Status Equity Award Variables: vesting, forfeiture & continued employment nontransferability cost of exercising award  Equity granted before or after marriage not marital property.  Exercise during marriage of equity award acquired prior to marriage may result in treatment as marital property

23. 23 Equity Award as Marital Property Equity award acquired during marriage treated as marital assets “earned” during marriage. Ȑ If vested, treated as marital property Ȑ If unvested, treatment as marital property may depend upon primary purpose of grant: Ȑ compensate for past services (“earned” during marriage)? If so, includible Ȑ incentive for future services (rendered after marriage dissolution)? If so, not includible

24. 24 Allocation of Unvested Award in Marital Estate Time Rule Formula Compare period employee owned equity award during marriage with period covering date of grant to vesting.

25. 25 Distribution Equity award subject to “equitable distribution” actual division may be delayed until award is exercisable grantee may be required to notify ex-spouse of exercise of award

26. 26 Equity Award as Income for Child Support Vested award treated as income for purposes of support calculation Courts struggle with treatment of unvested awards that vest only after child support obligation is determined

27. 27 Professional Biography Daniel N. Janich is founder and managing principal of Janich Law Group. His practice includes the design of employment and severance agreements, incentive arrangements, stock compensation plans and deferred compensation plans for executives of private and public companies. He counsels companies on employee benefit plan matters, including issues in corporate transactions. An experienced litigator, Mr. Janich has represented individual and corporate clients in numerous benefit and executive compensation disputes in state and federal courts. He is Co-chair of the Reporting & Disclosure Subcommittee in the ABA Labor Section’s Employee Benefits Committee, and former Chair of the Chicago Bar Association Employee Benefits Committee. Mr. Janich is Associate Senior Editor of and contributor to Employee Benefits Law and contributor to ERISA Litigation. His past speaking engagements include presentations on equity compensation issues at the annual conferences of the National Center of Employee Ownership. He received a B.A. cum laude from Marian College, J.D. from John Marshall Law School, and LL.M. in taxation from DePaul University.

28. 28 Daniel Janich Janich Law Group 222 N. LaSalle Street, Suite 2500 Chicago, IL 60601 312-609-4528 djanich@janichlawgroup.com Questions ?