• Robert M. Fields

3. Restricted Stock

a. Design:

i. Restricted stock is composed of shares of stock of a corporation (regardless of whether a “C” or “S” corporation). The shares of stock are subject to forfeiture back to the company in the event certain employment requirements or other vesting requirements are not met. These requirements can be based on the individual’s remaining in the employ of the company for a specific period of time and/or the company (or individual) satisfying pre-established and substantial financial or strategic goals and targets (see the discussion of Performance Shares and Performance Units, below).

ii. Individuals holding restricted stock may be credited with regular cash dividends paid with respect to their shares. Dividends or distributions credited during the vesting period may, if the company so desires, be subject to the same vesting provisions as are the shares of restricted stock with respect to which they were paid. In this case, the dividends and distributions will be held by the company until they vest (at which time they will be distributed to the individual).

b. Federal Income Tax Implications:

i. Impact on the Individual:

1. The value of the restricted stock generally will be includable in the individual’s gross income as of the date the restrictions lapse and the stock is no longer subject to a substantial risk of forfeiture. The individual will recognize ordinary income equal to the fair market value of the stock determined as of that date. Under certain circumstances, however, the individual may wish to make a so-called “Section 83(b) election” to have the value of the stock determined and includible in his or her gross income at the time of grant, regardless of any vesting restrictions on the stock. If the election is made, any appreciation in the value of the stock after the date of grant will be taxed at capital gains rates if and when the stock is sold by the individual. Thus, a Section 83(b) election may be worthwhile if (i) the value of the stock is relatively small on the date of grant, (ii) significant appreciation is expected between the date of grant and the date the restrictions expire and (iii) if the individual reasonably expects that he or she will eventually vest in the shares of restricted stock.

ii. Impact on the Company:

1. At the time the individual recognizes ordinary income upon the vesting of the restricted stock (or, if earlier, when the Section 83(b) election is made), the company generally will be entitled to a federal income tax deduction in the amount of the ordinary income so recognized, provided that the company timely reports to the Internal Revenue Service the ordinary income recognized by the individual pursuant to the award. Any dividends paid on restricted stock prior to the earlier of (i) the date the restrictions lapse or (ii) the date a Section 83(b) election is made will be deductible by the company as a compensation expense.

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