CIC: The Death of Automatic Accelerated Vesting?

Last week a tiny blurb in the CompensationStandards.com blog caught my eye. What it said was: "Last week, the Council of Institutional Investors approved a policy opposing automatic accelerated vesting of unearned equity in the event of a merger or other change-in-control. The recommended best-practice policy states that boards should have discretion to permit full, partial or no accelerated vesting of equity awards not yet awarded, paid or vested." What's the big deal about that? In today's NASPP blog I'll explore whether this means the death of automatic vesting provisions in the stock plan for change in control situations.

A Popularity Tug of War

Institutional investors and their advisers haven't been shy in labeling automatic vesting upon change in control ("CIC") as a negative stock plan feature. ISS's new Equity Plan Scorecard (as explained in the EPSC FAQs) puts this type of provision into the "could be negative and work against you" category (my loose liberty taken in interpreting here). In some cases, automatic CIC vesting could be considered egregious and result in an automatic "no" vote against a plan. And yet, according to the NASPP/Deloitte 2013 Stock Plan Design survey, the majority of companies who do allow for vesting acceleration upon a change of control have an automatic provision; far more than the number of companies who have incorporated board discretion into the determination about whether to accelerate vesting on all or some stock options and awards. With the Council of Institutional Investors taking a firm policy stance on the topic, a figurative tug-of-war seems to be more imminent - many stock plans have a feature providing for automatic acceleration upon CIC; the institutional investors are becoming stronger and more vocal in fighting the "automatic" aspect of these provisions. So who will win out? Does this mean that a new wave of stock plan amendments that will eliminate automatic vesting and implement more board discretion over these decisions? Time will tell, but it's not inconceivable that next time your plan is up approval or amendment, this feature may need to be reconsidered.

Best Practice vs. Practice

If provisions that allow for automatic vesting upon a CIC event are not favorable, then what is? As described in the first part of this blog, a scenario where the company's board has the ultimate say in whether or not vesting should accelerate appears to be the emerging preferred and best practice. It seems like this would be a win-win - the board would still retain ultimate decision making control, and shareholders would be reassured that automatic vesting is off the table. Given that many plans do currently have automatic vesting provisions, it seems there is some plan amendment work to be done. The timing and mechanics obviously are left to each company to determine based on their own internal factors. If, however, your company is in the process of drafting a new plan, or considering other amendments to the existing plan, the topic of change-in-control provisions may warrant some discussion with your advisers.

-Jenn