Category Equity Plan Provisions

Dividend and Dividend Equivalent Plan Provisions

One important change in the 2017 ISS policy updates with respect to ISS’ Equity Plan Scorecard (EPSC) policy is with respect to dividend and dividend equivalent provisions.  Until the 2017 policy updates, ISS policy had been to recommend against equity plans that permitted the current payment of dividends or dividend equivalents on performance-based awards prior to the vesting of such awards.  The policy permitted companies to accrue such dividends and dividend equivalents and pay them out when the performance-based award vested.

Now under the 2017 ISS policies (effective for shareholder meetings occurring on or after February 1, 2017), ISS will include a new factor under the Plan Features portion of its EPSC policy that will look to see whether dividends or dividend equivalents can be paid on any award under the plan prior to the vesting of the underlying shares/award. Companies that do not prohibit the payment of dividend and dividend equivalents on all plan awards before the awards vest, will receive no points under this factor. Companies that prohibit the payment of dividends and dividend equivalents until the awards vest (and can allow for accrual of such dividends/dividend equivalents), will receive full points under this factor. Because the ISS policy permit for the accrual of dividends and payment when the award vests, many companies will view complying with this prohibition to gain the points under the EPSC policy will make sense, and may enable them to gain a few additional shares in their request everything else being equal.

ISS has not yet released its FAQs on the new EPSC policy, but I expect that the FAQs will indicate that the old dividend/dividend equivalent policy with respect to performance-based awards has been supplanted by the new EPSC factor and anything less than a complete prohibition of the payment of dividend/dividend equivalents on all unvested awards will not provide any points under the EPSC policy.

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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 ( ) 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 ( and then filed the updated proxy with the amended proposed plan that had removed this transferability feature on November 28, 2016 ( 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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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: 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:


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:,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:

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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.

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