Category Equity Compensation Plan Amendments

Time to Check Your Shares!

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We are just now starting to get ready for the fall compensation committee meetings cycle for calendar-year companies. If your company’s stock price has been negatively impacted by the COVID-19 pandemic, now is a good time to look at your equity plans. You need to see how many shares are available and figure out how long those shares are likely to last given both current stock prices and potential changes in stock prices that might affect the size of your future annual equity grants.

I have already worked with several companies that undertook this exercise. Several companies have determined they have just enough shares to make it until their 2022 annual meeting, so they will continue on as normal until then. For others, they realized they might not have enough shares available after their 2021 annual grant, so they have started the process of going back to shareholders for approval of additional shares at their 2021 annual meetings.

It is better to test the waters on this before you get swamped with year-end duties. If you find you may need more shares after your 2021 annual grants, you can then calmly start the process for going to shareholders in 2021 for approval of more shares.

Questionable Equity Plan Provisions

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Drafting an equity compensation plan or reviewing your existing equity compensation plan in anticipation of taking a request to shareholders next proxy season to request additional shares? Do you know what provisions are questionable? Which will cause ISS to automatically recommend against the plan proposal (regardless of anything else)? And which provisions ISS will evaluate on a case-by-case basis, which would impact the total number of shares that might pass the ISS Equity Plan Scorecard model? If not, you might want to listen to the latest episode of the EC Minute…

 

Warning: Section 162(m) Language and Incentive Plans

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Just a quick word of warning to executive compensation professionals to take a long, hard look at both short-term incentive and long-term/equity incentive plans (and their associated proxy proposals ) that include Section 162(m) language. The reason is not so much the question of whether such Section 162(m) language is still needed (it might be if your company is putting forward a plan amendment and there are outstanding awards that may qualify for the Section 162(m) transition relief under the Tax Cuts and Jobs Act), but rather what justifications are given for seeking shareholder approval of the proposed plan.

If the proxy proposal indicates that one reason for requesting shareholder approval due to qualifying compensation paid under the plan under Section 162(m), then the plaintiff’s bar is ready to file suit.  I have been working with one company that filed its proxy early in 2018 and was requesting shareholder approval for both its annual and equity plans.  The company was on a fiscal year and the changes in Section 162(m) wrought by the Tax Cuts and Jobs Act will not fully apply until later in calendar 2018–after the company’s annual meeting. But, the proposals did not indicate this and the plaintiff claimed that the disclosures were misleading and sought an injunction.

So, practitioners should carefully evaluate the rationale given for seeking shareholder approval of any incentive plan being proposed in a company’s proxy statement.  If Section 162(m) is mentioned, then be sure to address the changes wrought by the Tax Cuts and Jobs Act and explain how the changes will impact the plan and awards under the plan going forward, as well as why shareholder approval would be needed in light of the changes to Section 162(m).

Finally, if the proposal is for a completely new plan, and there is no possibility that any of the Section 162(m) transition relief will apply to awards under the proposed plan, you may be tempted to eliminate all references to Section 162(m). Of course, even though certain elements of equity plans are no longer needed by Section 162(m), ISS has already said that it will be reviewing the elements included in plan documents. So it may not make complete sense right now to eliminate things like annual (or other period) limits on awards, especially to directors, or a list of potential performance metrics, and other elements that used to be included solely for Section 162(m) compliance reasons.

As they always said in Hill Street Blues, “Let’s be careful out there.”

Is it Better to Propose a New Omnibus Plan or to Amend an Existing Omnibus Plan?

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I am often asked whether it is better to ask shareholders to approve an amendment of an existing omnibus plan or a completely new omnibus plan. Generally, there is not too much difference since you can make the amendments ensure that the existing omnibus plan complies with current corporate governance best practices.  But, in point of fact, there is a slight difference when I look at the voting for proposals to amend an existing plan versus to approve a new plan.

Mind you, the difference is not all that much.  But for companies that are looking to do everything possible to ensure a favorable vote outcome, then serious thought should be given to adopting a new omnibus plan since such proposals receive higher levels of voting support.  That said, the median level of vote support for proposals to amend an existing omnibus plan are slightly higher than the median support for proposals to approve a new omnibus plan.  But this is offset by the fact that proposals to approve new omnibus plans have more votes coming in at or above the 90% level.

The charts below look at the vote support at median and average and by support level for both of these proposals using data from the ISS Voting Analytics database for S&P 500 companies with such proposals in 2015, 2016 and in 2017 so far.

Source: ISS Voting Analytics database