There are certain provisions that are required to be in stock plans in order to comply with regulatory requirements, including:
- The share authorization (number of shares authorized to be granted under the plan),
- The maximum term of the plan (typically set to 10 years if the plan is considered a “formula” plan or the formula is limited to 10 years),
- The Incentive Stock Option (ISO) Limit – the maximum number of shares that can be granted as ISOs under the plan (typically set equal to the full number of shares authorized for grant),
- The ISO maximum term (typically set to 10 years),
- Provisions to comply with Section 162(m)’s performance-based compensation exception,
- Provisions to deal with deferrals of compensation subject to Code Section 409A.
Besides these required regulatory provisions, certain institutional shareholders’ proxy voting guidelines may necessitate the addition of additional provisions to a plan, such as:
- Limits on the number of shares that can be granted as Full Value Awards (awards other than stock options or stock appreciation rights which are settled by the issuance of shares), such as through a fixed limit on Full Value Shares or a more flexible limit known as a Flexible Share Authorization* / Flexible Share Pool* / Fungible Share Pool (* Ed created both the Flexible Share Authorization and Flexible Share Pool),
- Limits on Change in Control provisions,
- Minimum vesting requirements for equity awards,
- Avoiding the use of certain provisions seen as undesirable by institutions, e.g., repricing and evergreen features,
- Limiting the way the plan is permitted to count shares, i.e. prohibiting “liberal share counting” provisions.
The sub-pages to this page (accesible in a sub-page navigation bar along the top of this page) walk through these required and desirable provisions to explain what each means.