The Emergency Economic Stabilization Act of 2008 (the "Act"), signed into law by President Bush on October 3, 2008, contains several provisions affecting executive compensation. Ambiguities in the Act, however, create questions as to the scope of the Act's provisions and permissible avenues of compliance.

The Act regulates executive compensation in two separate ways. Under one provision of the Act, institutions that benefit from government aid are directly prohibited from providing certain types of compensation to certain executives. Under another provision, the government uses the Internal Revenue Code of 1986, as amended, to prohibit deductions by these institutions and to tax their employees in the event certain compensation practices are not followed. This legislation is significant because the federal government has rarely strayed into the arena of directly regulating what types or levels of compensation may be paid, as opposed to regulating compensation by imposing tax sanctions or penalties. In this respect, the Act may represent an unprecedented level of activism by the federal government.

Because the penalties apply only to financial institutions that are assisted by the government under the Act, the lead decision makers of a troubled financial institution may be tempted to consent to an acquisition or investment by a private financial institution that is less favorable to shareholders than a transaction that includes federal assistance under the Act. This may be so despite decision makers' fiduciary obligations to maximize shareholder returns or, in the case of an insolvent corporation, to protect the interests of creditors.

In addition, because the applicable sanctions and penalties are limited to the arrangements entered into in connection with the current financial debacle, such sanctions and penalties will not prevent problems that may occur after the current financial crisis passes.


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