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).
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.