January 28, 2020

January 28, 2020

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January 27, 2020

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Is A Director An Employee? The SEC Has Some Contradictory Answers.

On Monday, I wrote about whether a director might be an employee following California's enactment the A-B-C test for determining status as an employee.  California, of course, does not determine employment status for all purposes. 

Determining employment status can be an issue for securities lawyers because both Rule 701 and Form S-8 are available only to employees and certain other specified persons.  Rule 405 of the Securities and Exchange Commission utilizes apophasis to define "employee":

"Employee.  The term employee does not include a director, trustee, or officer."

Although this definition is unambiguous and without qualification, the SEC staff interprets the definition to mean something other than what it literally states:

"Question: Notwithstanding the definition of employee in Rule 405, is a director considered to be an employee for purposes of Form S-8?

Answer: Yes. See the definition of "employee benefit plan" in Rule 405.
[Feb. 27, 2009]"

Compliance & Disclosure Interpretations - Securities Act Forms, Question 126.05.  However, the staff's interpretation is unnecessary and contradicted by Form S-8 itself.  General Instruction A.1(a)(1) provides:

"For purposes of this form, the term 'employee' is defined as any employee, director, general partner, trustee (where the registrant is a business trust), officer, or consultant or advisor."

To sum up, Rule 405 specifically excludes directors from the definition of "employee" while the staff considers directors to be employees for purposes of Form S-8 even though the form refers to employees and directors separately.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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