Article
280G golden parachute considerations for life sciences, technology industry
Oct. 2, 2022 · Authored by Jennifer Menendez, Adam Fleck
The nature of the life sciences and technology industries often results in companies experiencing a lot of M&A activity. Due to this activity, in conjunction with the forms of compensation often paid to employees in connection with a deal — for example, the acceleration of stock compensation — Internal Revenue Code Section 280G is an important consideration in the context of a deal.
What is section 280G?
Section 280G regulates excess parachute payments and benefits, which are commonly referred to as golden parachute payments, made to certain executives, employees, or board members in connection with a change in control of a C corp. While partnerships, LLCs, and S corps are generally exempt from Section 280G, certain payments made by such entities may be subject to Section 280G if they’re made in connection with the change in control of a C corp.
Application to life sciences and technology companies
Growing life sciences and technology companies are often targets of mergers and acquisitions and throughout their life cycles these companies can experience multiple changes in control. Section 280G is an important part of deals that’s often overlooked until the final stages before closing — for example, upon request from a potential buyer — causing additional stress and unnecessary headaches. Being aware of 280G and its potential pitfalls during the early stages of your deal can help prevent any surprises or delays in closing.
What’s considered a change in control?
For purposes of Section 280G, a change in control occurs when there’s an actual or effective change in control of the ownership or management of a corporation. This can include:
- A person or group of persons acquiring ownership of more than 50% of the fair market value or voting power of a corporation
- A change in ownership of a substantial portion of the assets of a corporation
- A person or group of persons acquiring 20% of the voting power of a corporation in a 12-month period
- A change in the majority of the board of directors in a 12-month period
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.