Caution on Transferable Equity Award Provisions

As companies begin to get their equity plan proposals ready for the 2017 proxy season, it is an appropriate time to review those equity plan proposals to see if they contain or permit the transfer of equity awards to third parties for value, e.g., the ability of participants to sell stock options to an unrelated investor, such as was done at Microsoft in 2003. If companies review ISS’s Equity Plan Scorecard Policy, there is not a specific mention of any concern over transferable stock awards.  Instead, companies need to review the ISS policy on Transferable Stock Option (TSO) Programs.  Under that policy, ISS indicates that it will recommend against equity plan proposals if the details of an ongoing TSO program are not provided to shareholders.

This is significant because the specific criteria that ISS expects companies to detail are not those ordinarily include in a typical equity plan proposal seeking shareholder approval of a new or amended equity plan, and include, but are not limited to, the following:

  • Eligibility
  • Vesting
  • Bid-price
  • Term of options
  • Cost of the program and impact of the TSOs on a company’s total option expense, and
  • Option repricing policy.

If a company’s equity plan provides for the transferability of equity awards to third parties, and the above TSO disclosure are not made (which ISS will then evaluate on a case-by-case basis), then the company can expect a negative ISS vote recommendation on their equity plan proposal even if they have run the ISS Equity Plan Scorecard model and believe the plan will pass muster.

Source: ISS United States Proxy Voting Manual, 2016 Benchmark Policy Recommendations, Effective for Meetings on or after February 1, 2016, Published February 23, 2016,  p. 187

This very scenario just played out at Thor Industries, Inc. Thor had an equity plan proposal in its proxy filed October 27, 2016 (https://www.sec.gov/Archives/edgar/data/730263/000119312516748833/d251706ddef14a.htm#tx251706_29 ) that provided for transferability of equity awards to third parties (see Section 6.6 of the Thor Industries, Inc. 2016 Equity and Incentive Plan). “A Nonstatutory Stock Option may, in the sole discretion of the Administrator, be transferable to a permitted transferee, as hereinafter defined, upon written approval by the Administrator to the extent provided in the Option Agreement.” The plan goes on to define permitted transferree to include “(b) third parties designated by the Administrator in connection with a program established and approved by the Administrator pursuant to which Participants may receive a cash payment or other consideration in consideration for the transfer of such Nonstatutory Stock Option.” [emphasis added]

As a result of this language, ISS found that the proposed plan permitted the transfer of stock options to financial institutions without prior shareholder approval.  ISS classified this as a problematic equity-related provision under its list of overriding features and practices.  As a result, even though the plan scored sufficient points under the ISS Equity Plan Scorecard to warrant ISS support, ISS nevertheless recommended against the proposed plan in its November 22, 2016 report. Thor announced it would amend its proposed equity plan to remove this transferability feature (https://www.sec.gov/Archives/edgar/data/730263/000114420416136370/v453873_defa14a.htm) and then filed the updated proxy with the amended proposed plan that had removed this transferability feature on November 28, 2016 (https://www.sec.gov/Archives/edgar/data/730263/000119312516777872/d301535ddefa14a.htm). Then on November 29, 2016, ISS released an updated Proxy Report Alert in which it changed it recommendation to support Thor’s proposed equity plan.

The odd thing in all this? None of Thor’s current named executive officers hold any stock options and stock options are not part of the long-term incentive program disclosed for fiscal 2016. This case serves as a good reminder to check equity plans being taken to shareholders to ensure that they do not permit such TSO programs without shareholder approval.

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