Pre-Filing Matters – Should a company review its compensation policies and principles prior to the IPO? – (20)

stock option purposes is consistent with that used for financial accounting purposes. The company should also consider whether to limit option grants as the IPO effective date approaches because option grants close to an
IPO may raise “cheap stock” issues. See “What is ‘cheap stock’?”.
Reviewing securities law compliance. A company should confirm that equity grants were made in compliance with federal and state securities rules, including the limits of Rule 701 under the Securities Act, to avoid rescission or other compliance concerns.
Adopting plans. Public companies are usually required by the exchanges to obtain shareholder approval for new compensation plans and material amendments. In order to obtain favorable “incentive stock option” (“ISO”) treatment under U.S. federal tax laws, the option plan must be approved by a company’s shareholders. An issuer will have greater flexibility to adopt compensation plans prior to its IPO. An issuer should adopt the plans it thinks it may need during its first few years as a public company (including an equity incentive plan, employee stock purchase plans, and Code Section 162(m) “grandfathered” bonus plans), and reserve sufficient shares for future grants.
Adoption of policies and clawback arrangements. Particularly in light of the new requirements ofDodd-Frank, a company should review or establish policies with respect to clawbacks of executive compensation, severance and post-

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