Dilution & Equity Plan Proposals

Dilution & Equity Plan Proposals

Dilution & Equity Plan Proposals

If you are taking an equity plan proposal to shareholders during the 2019 proxy season, you really need to know what your dilution is and will be at fiscal year-end. Why? First, it could impact the vote recommendation from ISS on your equity plan proposal. Second, it could negatively impact shareholder support for your equity plan proposal.


For 2019 shareholder meetings held on or after February 1, 2019, ISS has adopted a new “override” factor for its Equity Plan Scorecard (EPSC) model/policy. Regardless of how a proposed plan scores under the EPSC model, if the plan would cause dilution to be “excessive” ISS will recommend against it. For S&P 500 companies, excessive dilution means dilution greater than twenty percent (20%) and for other Russell 3000 companies it means dilution greater than twenty-five percent (25%). In some industries, this could be more of an issue than in others.

ISS is calculating dilution on a simple basis (as I explained in this Blog Post).

Shareholder Support

Based on prior research that I have conducted, the line in the sand for dilution that starts to see increased shareholder resistance, leading to less support for equity plan proposals, starts at about twenty percent (20%). As dilution goes above 20%, shareholder vote support starts to decline significantly, and then drops again once the 25% dilution level is passed.


Ensure that you have calculated your dilution currently and projected as of fiscal year-end, and also including any proposed equity plan share request. That way you will be alerted to whether dilution could cause an issue for your plan proposal. If so, it may necessitate some additional disclosures to illustrate why the request is sound and also require engaging with shareholders about the company’s need for shares in its equity compensation plans.

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Director Compensation: The Case for a Say on Director Pay Vote

As many who work in the area of executive and director compensation are aware, the landscape for director compensation has been undergoing some changes as a result of some recent court cases. The most recent came out in December 2017, In re Investor Bancorp.

Prior court cases (Seinfeld v. Slager and Calma v. Templeton) had held that shareholder approval of “meaningful limits” could constitute shareholder ratification that allowed directors actions in setting their own compensation to be reviewed under the business judgment rule. But, in In re Investor Bancorp, the Delaware Supreme Court held that when shareholders properly allege that directors breached their fiduciary duties when exercising discretion when setting their own compensation after shareholders have approved the general parameters of the compensation plan, the burden of proof shifts to the directs to show that their self-interested actions were entirely fair to the company (the “entire fairness” standard of review).

So, the prior court cases caused many companies to add a “meaningful” limit to total director compensation to their equity compensation plans that were put to shareholders for approval.  The limits were typically in the range of $500,000 to $1,000,000 in total compensation per director per year, depending on the size of the company. In re Investors Bancorp threw some uncertainty into that practice and had caused some commentators to wonder whether the Delaware court will uphold these types of limits. While I believe that is a valid concern, I see no way for a company to gain certainty about the courts upholding action undertaken pursuant to general limits established in a compensation plan barring a court ruling.

But, companies might be able to gain some certainty if they have an equity plan that states a “reasonable” limit for annual director compensation, and also put forth on the proxy statement a “Say on Director Pay” vote concerning the next year’s director compensation. Directors’ terms typically run from annual meeting to a subsequent (usually next) annual meeting, so having shareholders approve the directors’ compensation program for the next year period should work. The Say on Director Pay (SODP) vote would create a powerful presumption that shareholders approved the directors’ compensation (assuming directors only receive compensation that was detailed in the approval), which should enable the company to shut down any nuisance suits concerning director compensation.

Of course, care would need to be taken in drafting the SODP. The SODP should apply for the next year period or until shareholders are asked to approve a different compensation program for directors.  In this way, companies would only need to present a SODP on their proxy statements when director pay changes. For some companies, this might mean it becomes an annual item in the proxy. But for other companies, it could be a less frequent item on the proxy. In either event, by having shareholders approve the actual director compensation program, it would address many of the lingering issues after In re Investors Bancorp and its finding that the “entire fairness” standard of review applied and not the business judgment rule for review when directors set their own compensation under a compensation plan with “meaningful limits” on director compensation. While some companies might not want to “set a precedent” by asking shareholders to approve director compensation, others might view this as an appropriate corporate governance response to the situation that helps ensure that shareholder approval is obtained before director compensation is awarded, which dramatically lessens the potential for arguments of self-dealing by plaintiffs’ attorneys.

Indeed, at least one company has already agreed to hold a SODP vote. In June 2018, OvaScience filed a proposed settlement of its director compensation lawsuit (Fulton v. Dipp) which included a SODP vote every three years. So perhaps the SODP will start to catch on.  Likely would be eventually be viewed as a “routine” proposal and provides some protection against the plaintiffs’ bar which appears to have focused on director compensation issues.

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Equilar Peer Group Submission Window Opens

On November 28, 2018, Equilar announced that its 2019 peer submission window opened. The submission deadline is December 31, 2018. Companies have the opportunity to submit the peer companies that will be listed in a proxy to be filed between January 15, 2019, and July 15, 2019. This will help ensure that Equilar uses the correct company peers when constructing its MarketPeers for the company.

According to Equilar:

  • institutional investors use Equilar’s MarketPeers for independent validation of  company disclosed peer groups,
  • Glass Lewis uses Equilar’s MarketPeers algorithm to generate peer groups using in formulating Say on Pay recommendations for investors, and
  • The Pay for Performance (P4P) modeler in Equilar Insight’s Shareholder Engagement Center includes simulations for ISS and Glass Lewis P4P analyses based on the most recent peer group information.

The Equilar web page where companies may submit their peer groups is:


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ISS Issues Preliminary FAQs on Compensation Policies for 2019

ISS Issues Preliminary FAQs on Compensation Policies for 2019

On November 21, 2018, ISS issued a set of preliminary FAQs on Compensation Policies for 2019. These FAQs are effective for shareholder meetings on and after February 1, 2019.

The key points from these preliminary FAQs are:

  • Quantitative Pay-For-Performance Screen: ISS will not make any changes to its quantitative pay-for-performance screens for 2019.
  • “Excessive” Non-Employee Director (NED) Pay: ISS will not begin to apply the “excessive pay” policy concerning NED pay until 2020 (instead of the originally announced 2019), as it intends to provide more details on the methodology it employs in identifying NED pay outliers.
  • Equity Plan Score Card (EPSC) Scoring: EPSC scoring thresholds will remain the same as 2018
  • EPSC “Overriding” Factors: ISS will now include excessive dilution (simple dilution) as an overriding factor that will cause it to recommend against equity plan proposals. For S&P 500 companies the dilution trigger is greater than 20 percent, and for other Russell 3000 companies, the dilution trigger is greater than 25 percent. ISS defines dilution for this purpose as (A + B + C) / CSO, where A = # of new shares requested, B = # shares that remain available for issuance under continuing plans; C = # unexercised/unvested outstanding equity awards; and, CSO = common shares outstanding.
  • EPSC Model’s Change-in-Control (CIC) Factor: The CIC factor under the EPSC model will be updated to evaluate the quality of disclosure of CIC vesting provisions, rather than be based on the actual vesting treatment of awards as was previously the case. Full points under the CIC factor will require the equity plan to disclose with specificity the CIC vesting treatment for both performance- and time-based awards. If the plan is silent on the CIC vesting treatment for either type of award, or if the plan provides for merely discretionary vesting of either type of award, then no points will be earned for the CIC factor.

The ISS Preliminary FAQ: US Compensation Policies, can be found at:


See related EC Minute episode on ECMinute.com


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