Qwest's move gives top execs millions in tax breaks
By Andy Vuong
December 28, 2010
Four days before Christmas, Qwest gift-wrapped millions of dollars in tax breaks for top executives in a move that included a special waiver from the company's board of directors to avoid a shareholder vote.
The Denver-based telecommunications company, which is merging with CenturyLink, accelerated into this year the vesting of restricted stock awards and payments of cash severance.
The change made Dec. 21 gives executives stock and cash compensation that they would not have gained control of or been paid until the expected close of the merger sometime in the first half of 2011.
By receiving the stock and cash this year, some executives, including chief executive Ed Mueller, avoid a 20 percent nondeductible excise tax.
The company revealed the move in a filing late Wednesday with the Securities and Exchange Commission but did not disclose how many executives would benefit.
Qwest said the change was made "in order to preserve economic benefits to our shareholders," noting that the company will save roughly $120 million in taxes.
About half of those savings will come from not having to pay excise taxes on stock and cash awards for some executives, which the company would have been required to do as part of their employment contracts, said Qwest spokeswoman Diane Reberger.
The other savings come from tax deductions on income that otherwise would not have qualified for deductions if they were paid next year, she said.
Mueller would have had to cover his own taxes without the move. By receiving his stock awards this year, valued at more than $57 million based on Qwest shares closing Monday at $7.70, Mueller avoids an excise-tax bill of more than $11 million.
The filing states that Mueller agreed to forgo nearly $11 million in pretax cash severance, which would have been subject to an excise tax. Even after relinquishing the severance pay, Mueller will "experience a net financial benefit" from the acceleration of the awards, the filing states.
"It sounds very self-serving to me," said Michelle Leder, founder of Morningstar's footnoted.com, which tracks questionable regulatory filings.
"(They say,) 'We're doing this in the name of protecting our shareholders,' but the people who seem most to benefit are quite frankly the top executives," she said. "Someone who owns 100 shares of Qwest, it's not going to make a big difference to them."
Qwest's board had adopted a policy in 2008 that prohibited the company from entering into a new severance arrangement with a senior officer unless it was approved by stockholders. Qwest said in Wednesday's filing that it didn't believe the acceleration of stock awards and cash severance violated this policy, but the company's board approved a waiver in case it did.
Reberger said that even though executives will receive their restricted stock and performance shares this year, they will not be allowed to sell them until after the merger closes.
Three employees will receive accelerated cash severance payments this year. The only employee named in the filing getting the benefit is chief operating officer Teresa Taylor, who will receive nearly $5 million in severance pay and $1.1 million to cover taxes.
The company will take an $80 million accounting charge connected to the vesting of the stock awards in the fourth quarter. Its cash reserves will drop by $150 million because of tax withholdings tied to restricted stock awards and severance payments.
"We would've had to take that expense at some point," Reberger said. "We're just taking it this quarter."
The CenturyLink merger still requires approval from regulators in several states and the Federal Communications Commission.
A "financial benefit"
Value of restricted stock and performance shares awarded to top Qwest executives based on Monday's close of $7.70 per Qwest share:
Ed Mueller, chief executive, $57.4 million
Teresa Taylor, chief operating officer, $23.3 million
Joe Euteneuer, chief financial officer, $19.8 million
Rich Baer, general counsel, $18.7 million
Dan Yost, executive vice president, $13.5 million
Source: Securities and Exchange Commission filing