Share Authorizations

The share authorization must at least specify the maximum number of shares available for grant under the equity compensation plan.  But, as a result of institutional investor concerns about the “cost” of plans, there are a few different ways for share authorizations to be established:

• No Limits Share Authorization – Prior to about 2000, most equity compensation plans were established with a set number of shares which could be granted as any type of award available under the plan without limit, a No Limits Share Authorization. Today this type of share authorization is used by companies that care about the RMG vote recommendation for their plans if they are granting primarily full value awards and want to be able to add back shares withheld to satisfy taxes and count only the net number of shares issued upon exercise of a stock option or stock appreciation right, i.e., liberal share counting provisions,
• Evegreen Provision — Prior to about 2000, a number of companies “supplemented” their No Limits Share Authorizations by including an “evergreen” provision.  These provisions typically were written to add a set number or percentage of common shares outstanding back to the plan every year, i.e., 2% of common shares outstanding on December 31 will be added to the share authorization on January 1 of the following year.
• Fixed Number of Full Value Awards –  The first limits that were placed on equity compensation plan share authorizations were a result of RiskMetrics Group’s (then, Institutional Shareholder Services) policy to analyze the “cost” of plans and only recommend FOR plans that had a cost below a company’s allowable cap. Consequently, to limit the cost of share authorizations, at a time when most companies were granting stock options, companies adopted plans with fixed limits on the number of shares that could be granted as full value awards.
• Flexible Share Pool– While the Fixed Number of Full Value Awards share authorization worked to limit the cost, it also caused companies some pain when their equity grant practices changed from all stock option grant to either more of a blend of stock options and Full Value Award or all Full Value Awards.  Some companies ended up using all of the shares available under their plans for full value awards and the only shares available in their plans could only be granted as stock options or stock appreciation rights.  So, since the Full Value Award Limit authorization was driven by RMG’s cost policy, I looked at the values generated by the model for different awards and concluded that another share authorization would be possible – one in which there would be a set number of shares authorized but the shares granted pursuant to different types of awards would count differently against the share authorization.  Most typically, stock options and stock appreciation rights count as one share against the share authorization while full value awards count as a higher number against the share authorization. This is referred to as a Flexible Share Authorization, a Flexible Share Pool and as a Fungible Share Pool.