Equity Plan Provisions

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.


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 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

Equity Award Implications of the Newly-Signed Pension Relief Act

The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 was signed into law by President Obama on Friday, June 25. Among other things, it could ultimately have an impact on standard equity vesting provisions. Why?

Under this Act, the required funding of pension plans for companies relying on the pension funding relief offered by the Act will be increased in any year by the amount of “excess employee compensation” it pays that year, plus the amount of any extraordinary dividends and redemptions.

“Excess employee compensation” is defined as the aggregate amount includible in income for any employee for any plan year over $1 million. Also included in this $1 million amount are assets set aside or reserved during the year to pay nonqualified deferred compensation using a trust or similar arrangement, or transferred to such a trust/arrangement by a plan sponsor to pay deferred compensation to an employee.

But, certain amounts are excluded from the definition of “excess employee compensation,” including “any amount includible in income with respect to the granting after February 28, 2010, of service recipient  [employer] stock (within the meaning of section 409A) that, upon such grant, is subject to a substantial risk of forfeiture (as defined under section 83(c)(1)) for at least 5 years from the date of such grant.” In other words, stock options, restricted stock and certain other stock-based compensation granted after February 28, 2010 with at least a 5-year vesting schedule will be excluded from the definition of “excess employee compensation.”

Thus, to the extent companies want to ensure that their pension funding obligations are minimized, they could adopt 5-year vesting for equity awards to ensure they are excluded from the definition of “excess employee compensation” for purposes of the funding requirements.

Here’s a link to the status page with a copy of the enrolled act as passed by House and Senate:


Updated 7/15/2010: Clarified that the “excess employee compensation” and additional funding provisions only apply to companies that take advantage of the pension funding relief provided by the Act.

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 Friendly, PDF & Email

Launching 9/8/2009!

Thanks for visiting!

Only a few more days until I officially launch this blog.  Until then, feel free to wander around, but keep in mind that things are still “under construction.” Also, please take a look at my presentation on implementing new equity compensation plans and plan amendments (link below):

View more presentations from EHauder.

If you have any suggestions on how this site could be useful to folks interested in equity compensation plans, please let me know.


Best regards,
Ed Hauder

Print Friendly, PDF & Email