Equity Compensation Plan Amendments

Share Withholding at Maximum Tax Rate

Accounting Standards Update (ASU) No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (available at: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2 FDocumentPage&cid=1176168028584. 2) permits companies to withhold shares up to the maximum statutory tax rates (once a company is applying all the provisions of ASU 2016-09). Many existing equity compensation plans specifically limit share withholding to the minimum statutory tax rates in order to avoid potentially negative accounting consequences, i.e., liability accounting instead of fixed, grant-date accounting for equity awards. So the question has been raised whether amending an existing equity plan that limits share withholding to the minimum statutory tax rate would pose an issue under the exchanges rules.  NYSE and NASDAQ have now both issued guidance on this issue which should help companies as they consider adopting ASU 2016-09 and implementing maximum share withholding.

NYSE

The NYSE indicates that a rule to add back shares that have never been issued is not a “formula.” Consequently, amending a plan to provide for withholding of shares based on a grantee’s maximum tax rate rather than the statutory minimum tax rate is not a material revision if the withheld shares are never issued, even if the withheld shares are added back to the plan.

But the NYSE also indicates that a rule to add back shares that have actually been issued generally would be considered a formula. Furthermore, the NYSE states that a rule to add back shares that are withheld from restricted stock upon vesting to cover taxes is a formula unless the forfeited shares are immediately cancelled upon vesting. Therefore, if the plan involves a formula, it must be limited to a term of 10 years from the date of the last shareholder approval. Consequently, if a plan sets the share withholding rate at the minimum statutory rate for restricted stock (and other awards where the shares are issued), then a change to increase the share withholding to the maximum statutory rate would be considered a material amendment that would require shareholder approval.

NYSE’s FAQs, including FAQ C-1, can be found at: https://www.nyse.com/publicdocs/nyse/regulation/nyse/equitycompfaqs.pdf

NASDAQ

NASDAQ also released guidance on this issue, but failed to specifically address the issue of issued versus unissued equity awards. According to the NASDAQ guidance, an amendment to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to an equity compensation plan. But the guidance then goes on to state that allowing the holder of an award to surrender unissued shares to pay tax withholdings is similar to settling the award in cash at market price, and neither creates a material increase in benefits to participants nor increase the number of shares to be issued under the plan.

The NASDAQ guidance does not specifically address what happens if such a plan amendment is made to permit the surrendering of additional issued shares to pay tax withholding (e.g., restricted stock).  I think with the use of the term “unissued” in the NASDAQ guidance that NASDAQ is more than likely taking a similar stance as the NYSE, but some additional clarification from NASDAQ regarding issued share awards would be helpful.

NASDAQ’s FAQS can be found at: https://listingcenter.nasdaq.com/Material_Search.aspx?cid=71&mcd=LQ&sub_cid=114,97,109,101,103

Final Thoughts

If you are considering amending an existing equity plan to increase the share withholding rate to permit up to the maximum statutory rate (and you will be adopting the other ASU 2016-09 requirements), it is important to analyze the plan’s equity awards to determine if there are any would have issued shares, such as restricted stock. If so, then the plan amendment might be able to be crafted so that it maintains the plan’s existing tax withholding rate for issued share awards and only permits the increased tax withholding for unissued awards and therefore would not necessarily require shareholder approval.  Needless to say, companies should check with their legal and accounting advisers before undertaking such a plan amendment to ensure that it can be done without shareholder approval. Alternatively, companies could put the amendment to shareholders for approval, but should recognize that ISS likely will apply its Equity Plan Scorecard policy to the amended plan in making its vote recommendation.

For more information about ASU 2016-09, see this Exequity Client Alert: http://www.exqty.com/uploads/6/9/9/0/69908991/fasb_update_asc_718.pdf

Print Friendly, PDF & Email

SEC Proposes to Eliminate Equity Compensation Plan Information Table

According to this BNA blog (http://www.bna.com/sec-proposal-end-b73014445191/), the SEC has proposed to eliminate the Regulation S-K, Item 201(d) disclosure, i.e., the Equity Compensation Plan Information Table that is included in the proxy or annual report depending on whether a compensation plan is being put to shareholder vote.  This table provides the outstanding and available shares for shareholder approved and non-shareholder approved equity compensation plans, as well as weighted average exercise price for the outstanding equity awards.

The rationale appears to be that given current financial accounting standards, much of this information is now contained in a company’s publicly-filed financial statements.  While that is true to some extent, in my experience, the financial statements are not always the picture of clarity on such disclosure and I believe less information will ultimately be reported about equity plans if this proposal passes.

We will have to watch where this SEC proposal ends up when the final regulations gets issued.

Print Friendly, PDF & Email

Thinking of Taking a Plan to Shareholders?

Then here are five things you can do to help increase the chances that you will receive a favorable reaction from shareholder on your equity compensation plan proposal:

  1. Know What You Need: Figure out what types of awards and how many shares your company needs and why, i.e., what strategic goal(s) will having this plan/these shares help the company (and the employees) achieve?
  2. Know Your Shareholders: Figure out who your company’s top shares are, and what they want in an equity compensation plan.
  3. Know What You’re Willing to Do: Determine what your company is willing to do and why it can/can’t meet all of its shareholders’ requirements.
  4. Communicate with Shareholders: Talk to your key shareholders (top 10-20) to explain your proposal, why needed, and why can/cannot comply with all the shareholders’ requirements (as applicable), and why the shareholder should still support the proposal.
  5. Consider the Retail Vote: If your company shares are held by a significant number of retail investors or you think the retail vote could be more favorable to the proposal, consider whether it makes sense undertaking a retail vote solicitation to encourage retail investors to participate in the vote.
Print Friendly, PDF & Email

Equity Plan Proposal Update – 9/11/09-9/30/09

Sorry for the delay in posting this, but things are starting to get busy as more companies turn to preparing for asking shareholders to approve shares for their equity plans next year.  Below you’ll find details about the equity plan proposals submitted by Russell 3000 companies during the period 9/11-30/2009. I’ve included their name, plan name, proposal type (New = new plan being proposed, Amend = amendment of existing plan, and A&R = an amendment and restatement of an existing plan), the scheduled shareholder meeting date, and the % of Common Shares Outstanding (net new shares) represented by the share request:

Company Plan Name Proposal Type Sh Mtg Dt % of CSO
Allis-Chalmers Energy Inc. 2006 Incentive Plan A&R 11/6/2009 8.18%
Archer Daniels Midland Co. 2009 Incentive Compensation Plan New 11/5/2009 4.67%
Cell Therapeutics 2007 Equity Plan Amend 10/20/2009 8.04%
Cisco Systems Inc. 2005 Stock Incentive Plan A&R 11/12/2009 3.61%
First Marblehead Corp. 2003 Stock Incentive Plan A&R 11/16/2009 4.03%
Harris Stratex Networks, Inc. 2007 Equity Plan A&R 11/19/2009 9.17%
Hi Tech Pharmacal Co. Inc. 2009 Stock Option Plan New 11/12/2009 4.23%
Huntsman Corp. Stock Incentive Plan Amend 11/4/2009 4.64%
II-VI Inc. 2009 Omnibus Incentive Plan New 11/6/2009 5.42%
KLA Tencor Corp. 2004 Equity Incentive Plan A&R 11/4/2009 6.44%
LSI Industries Inc. 2003 Equity Compensation Plan Amend 11/19/2009 7.28%
Matrix Service Company 2004 Stock Incentive Plan Amend 10/23/2009 4.20%
Mercury Computer Systems Inc. 2005 Stock Incentive Plan A&R 10/21/2009 6.38%
Meredith Corp. 2004 Stock Incentive Plan A&R 11/4/2009 7.74%
Myriad Genetics Inc. 2003 Employee, Director and Consultant Stock Option Plan Amend 11/5/2009 3.12%
Oplink Communications Inc. 2009 Equity Incentive Plan New 11/4/2009 6.81%
Parker Hannifin Corp. 2009 Omnibus Stock Incentive Plan New 10/28/2009 3.42%
Saba Software Inc. 2009 Stock Incentive Plan New 11/18/2009 10.41%
Western Digital Corp. 2004 Performance Incentive Plan A&R 11/11/2009 6.44%

Some observations about these plans:

  • I’ve noticed that a few companies that amend an existing plan choose to only put the plan language that was amended into their proxy.  That is fine if they want to save space and thus fees associated with printing and distribution of the proxy. However, it does make it more difficult for shareholders to find the existing plan document to be able to understand the amendments in context of the broader plan.  So, if a company wants to save money and only include the amendments, they could make it easier for their shareholders to find the plan by posting their plans on their website, something akin to what they do know for their corporate governance documents. Having done so, they could then simply include a simple line in the text of the proxy proposal indicating the URL where the entire plan (possibly marked to show the changes?) can be found on the company’s website.
  • It is almost a dead tie in these plan proposals for treatment of Full Value Awards (awards other than stock options or stock appreciation rights that are setlled in stock) – about half set no limit on the number of shares that can be granted as Full Value Awards, while the other half used a Flexible Share Pool approach (stock options and SARs count as 1 against the plan’s share authorization while Full Value Awards count at a higher rate against the share authorization). Of course, there was one company that opted to use a good old fixed limit on the number of shares that can be granted as Full Value Shares (let’s hope they don’t end up with too many left-over stock options that they can’t use).
  • At least one company appears to be setting things up to utilize the RiskMetrics’ exemption for in-the-money stock options that have been outstanding greater than 6 years.  Another company that has provided such disclosure was the Walt Disney Company.
  • It looks like a couple of these companies failed RiskMetrics’ Burn Rate Test and had to commit to maintaining their burn rate at a set level for the next 3 years as this was set out in the plan proposal.
  • At least one plan has no limit on Full Value Awards and yet was written so that liberal share counting was prohibited (not typically necessary under the RiskMetrics ISSue Compass model and SVT Cost Policy).  This could cause the plan to run out of shares sooner than if such language was included.

[print_link]

Print Friendly, PDF & Email