280G Shareholder Approval Vote: Waiver, Disclosure, and 75% Threshold

A private company can wipe out the golden parachute penalties under Internal Revenue Code Section 280G by holding a 280G shareholder approval vote before the deal closes. Approval from holders of more than 75 percent of the company’s disinterested voting power eliminates both the 20 percent excise tax on the affected executive and the company’s lost deduction. Getting there requires signed waivers from every affected individual, full disclosure to the shareholders, and clean documentation, all completed before the change in control takes effect.

Which Companies Can Run the Vote

The shareholder approval exception is available only to private companies. The statute requires that immediately before the change in control, no stock in the corporation was readily tradeable on an established securities market.¹ Stock counts as readily tradeable if brokers or dealers regularly quote it. The rule also looks through holding structures: if a substantial portion of an entity’s assets consists of stock in the company and interests in that entity trade on a public market, the exception is unavailable. Substantial portion here means the stock’s fair market value equals or exceeds one-third of the entity’s total gross asset value.² Affiliated groups are treated as a single corporation, so if any group member has publicly traded stock, the entire group is disqualified from using the vote.

One boundary worth flagging before you plan a vote. Companies that meet the eligibility requirements for S corporation status under Section 1361(b), generally no more than 100 shareholders (all individuals or certain trusts) and only one class of stock, are completely exempt from Section 280G regardless of whether they actually elected S corp treatment.¹ If your company qualifies, you do not need a vote at all. Section 280G also applies by its terms to C corporations, not partnerships or LLCs taxed as pass-throughs, though some acquirers ask for a member vote from LLCs anyway when the deal structure is ambiguous.

Who the Vote Actually Covers

Only payments to “disqualified individuals” are at issue. The rules cover three categories of people who performed services for the company in the 12 months before the change in control:

Officers of the corporation.
Shareholders owning more than one percent of the corporation’s stock by value.³
Highly compensated individuals, meaning the highest-paid one percent of employees or the top 250 employees, whichever group is smaller.⁴

The highly compensated category has a floor. Anyone whose annualized compensation falls below the Section 414(q)(1)(B)(i) threshold for the year of the change in control is not a disqualified individual under this prong. For 2026, that threshold is $160,000.³

The one-percent shareholder test uses the constructive ownership rules of Section 318, which attribute stock between family members, from trusts to beneficiaries, and from entities like single-member LLCs to their owners. Someone who holds zero shares directly can still be a disqualified individual because stock owned by a parent, trust, or wholly owned LLC is counted as theirs. Skipping the attribution analysis is where companies most often miss a hidden disqualified individual, and that miss can invalidate the entire vote later.

When the Calculation Triggers

The vote only matters if the payments actually cross the parachute threshold. Start with a base amount for each disqualified individual: the average of their annual taxable compensation from the corporation over the five tax years ending before the change in control.³ Fewer than five years of service? Use whatever years exist.

Then add up the present value of every payment to that person that is contingent on the change in control, including cash bonuses, accelerated stock options, continued benefits, and severance. If the total equals or exceeds three times the base amount, every dollar of those payments becomes a parachute payment.³ This is a cliff, not a gradient. Come in at 2.99 times and nothing happens; hit exactly 3.00 and the entire amount is in play.

The excess parachute payment, meaning the portion that triggers penalties, is the total parachute payment minus the individual’s base amount, allocated proportionally across all payments.³ Without a successful vote, the individual pays a 20 percent excise tax on that excess under Section 4999, on top of regular income taxes,⁵ and the corporation loses its deduction for the excess amount entirely.¹

The Waiver Comes First

Before the company can hold the vote, each disqualified individual whose payments are at issue must sign a binding waiver agreeing to give up any excess parachute payments if the shareholders vote no.² Not optional. Without a valid waiver in place before the vote, the shareholder approval exception fails entirely, and the penalties apply as though no vote occurred.

The reasoning is simple. A vote only counts if the shareholders can actually say no. If the executive would collect the excess payments regardless of the result, the vote is theater. The waiver puts real money on the line and makes the outcome consequential. Waivers typically reference the specific dollar amounts identified in the 280G calculations and are drafted to comply with the regulatory requirements. They also protect the company from breach-of-contract claims, because the individual has voluntarily agreed to forfeit the excess if shareholders reject it.

What Shareholders Must Be Told

The regulations require adequate disclosure to every person entitled to vote, covering all material facts about all payments that would be parachute payments without the exemption.² Adequate disclosure means a full and truthful presentation of material facts, along with enough additional information to prevent the disclosure from being misleading. A typical disclosure package includes:

The names of all disqualified individuals with payments subject to the vote.
The total dollar value of each individual’s payments, broken down by type (cash severance, accelerated equity, benefits continuation, and so on).
The base amount calculations and how the three-times threshold is met.
The tax consequences if the vote fails, including the 20 percent excise tax to the individual and the lost deduction for the company.

The regulations do not set a specific waiting period between delivery and the vote; disclosure simply has to reach all entitled shareholders before the vote occurs.² Handing over a 30-page package the morning of the vote invites a later challenge to whether disclosure was really adequate. Allowing at least several business days for review is standard practice.

The 75 Percent Threshold and Who Is Excluded

Approval requires more than 75 percent of the voting power of all outstanding stock, measured based on ownership immediately before the change in control.¹ That bar sits well above the simple majority governing most corporate actions.

Shares held by the disqualified individuals whose payments are being voted on are excluded from the voting pool. The exclusion extends to shares constructively owned under Section 318 attribution, including stock held by family members, trusts, and controlled entities. Pulling those shares out of the denominator means the remaining shareholders have to deliver the 75 percent from a smaller base, and each independent vote carries more weight.

The Treasury has regulatory authority to prescribe additional rules for situations involving entity-shareholders and nonvoting interests, and those cases can get complex.¹ If your cap table includes entity holders with layered ownership, work through the specifics with counsel before finalizing the vote mechanics.

Timing and Mechanics

The vote must be completed before the change in control. This is absolute. If closing happens before the vote finishes, the exception is lost, with no cure available. Companies typically schedule the vote at least a few business days before the expected closing date to absorb any last-minute schedule shifts.

Most private companies use written consent rather than calling a formal shareholder meeting. Deal timelines rarely accommodate the notice periods a duly called meeting requires, and most private company charters and state corporate laws permit shareholder action by written consent signed by holders of the required voting power. Written consent is faster, but the company still has to confirm that every entitled shareholder received the disclosure package before the consent is circulated.

Once voting closes, the company certifies the results by documenting the exact percentage of voting power that approved the payments. That certification becomes part of the permanent corporate record and is the primary evidence during any future IRS examination. The vote might pass cleanly, but if the company cannot later produce the percentage, the disinterested shareholder analysis, and the disclosure materials, proving compliance years down the road becomes unnecessarily hard.

What Happens After the Vote

If the vote succeeds, the parachute payment rules effectively fall away for the approved payments. The disqualified individual receives the full amount without the 20 percent excise tax, and the corporation deducts the payments as ordinary compensation expenses. Approval works as a safe harbor that removes both penalties as though the payments had never crossed the three-times threshold.

If the vote fails, the waiver takes over. The individual forfeits any payments exceeding the amounts permitted without shareholder approval, as specified in the waiver, and the company withholds or cancels those excess amounts. Because the waiver was signed in advance, the consequences are automatic and enforceable.

A failed vote does not block the deal. The transaction proceeds, and only the excess compensation is affected. The individual still receives any portion of compensation that sits below the parachute threshold. Some companies plan for this outcome by structuring payments to fall just under three times the base amount if the vote fails, preserving as much compensation as possible while avoiding penalties.

1
Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments
2
eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments
3
eCFR. 26 CFR 1.280G-1 – Golden Parachute Payments
4
Office of the Law Revision Counsel. 26 USC 280G – Golden Parachute Payments
5
Office of the Law Revision Counsel. 26 USC 4999 – Golden Parachute Payments