Who Can Approve Equity Grants? Flexibility for Delaware Corporations

Delaware recently amended its general corporation law to expand the extent to which authority to approve equity awards can be delegated to individuals who are not directors. This blog summarizes the new law.

Who Cares About Delaware State Law?

Chances are, you do. State corporate laws stipulate which individuals or entities have authority over issuances of company securities, including equity awards. For this purpose, your company is subject to the laws of the state it is incorporated in. Most US corporations are incorporated in Delaware. If this is the case for your company, Delaware's laws apply to you.

Authority to Approve Equity Awards Under State Law

Under all state laws, issuances of company securities (including stock, stock and unit awards, stock options, etc.) must be properly approved; a company’s board of directors has authority to approve such issuances. In most (possibly all) states, the board of directors can delegate this authority to a committee of the board (and a committee can consist of just one director).

Delaware's corporate laws expand this flexibility even further. Effective August 1, 2022, under amended Sections 152 and 157 of the Delaware General Corporation Law:

• The board can delegate authority to approve issuances of company securities, both stock, including restricted stock, and derivative securities, such as employee stock option or unit awards, to any person or body (e.g., a committee). The delegate does not need to be an officer of the company or a board member.
• The delegate may be granted the authority to approve issuances of securities to any person or body, except that delegate may not approve issuances of securities to themselves. Previously, delegates could not be granted authority to approve the issuance of securities to nonemployees.
• The delegate may determine both the recipients of issued securities as well as the number of securities to be issued.
• The delegate may determine the terms under which the securities will be issued. Thus, delegates can establish vesting and other equity award conditions.

Some Limitations Still Apply

Where a board wants to delegate authority to approve grants—whether to a committee of the board, individual, or other entity—the board should do so via a formally adopted resolution. Under Delaware law, any resolution delegating authority to approve issuances of company securities must specify the following:

• The maximum number of shares, options, units, or other rights that may be issued pursuant to the resolution.
• The time period over which the delegate is authorized to approve equity awards.
• For options, restricted stock units, and similar rights, the time period over which the securities may be issued under awards approved by the delegate. This is not required for restricted stock.
• The minimum amount of consideration to be paid for the equity awards. It is permissible for the resolution to indicate that grants will be issued for no consideration. This is not required for restricted stock.
• The minimum consideration to be paid for any shares acquired under the arrangement. For previously unissued shares, this amount cannot be less than par value, although it is acceptable for the payment of par value to be in the form of past or future services.

Plan Must Allow Delegation

Before your board delegates authority to approve equity awards, the plan under which the awards are granted must allow this. Some plans allow authority to approve grants to be delegated only to board members or officers. Plans that allow granting authority to be delegated to officers may require the terms and conditions of the grants to adhere to those pre-approved by the board or compensation committee.

Luckily, plans can always be amended, oftentimes without shareholder approval. Where it is desirable expand the board's ability to delegate authority to approve grants, most plans can be amended to allow this with board action alone. The board could even (A) amend the plan to expand the delegation of authority provision and (B) vote to delegate authority under the amended plan at the same meeting; but to be safe, make sure they do it in that order.

Consider a Grant Approval Committee

Currently, at most companies where authority to approve grants has been delegated to in-house personnel, the delegate is most commonly the CEO. With the flexibility provided under Delaware law, companies may want to consider whether the CEO is the best person to approve equity grants. I personally like the idea of establishing a committee of in-house personnel to approve grants, perhaps even a cross-departmental committee consisting of high-ranking personnel from HR, accounting/finance, and legal.

Using an internal committee to approve grants could help avoid improprieties in the selection of grant recipients, such as a situation that happened at McDonald’s. As covered in “Across Our Desk” in the Fall 2020 issue of the NASPP Advisor, a now former CEO of McDonald’s, who had authority to approve grants, issued a award to an employee that he had an inappropriate sexual relationship with.

When more authority is granted to delegates, the potential for improprieties increases. Although establishing an approval committee isn’t a foolproof solution, it builds additional controls into the approval process that can help mitigate this risk.

Don’t Forget About Rule 16b-3

The flexibility provided under Delaware law doesn’t extend to Rule 16b-3, which companies rely on to exempt grants of equity awards to Section 16 officers and directors from the short-swing profits recovery provisions of Section 16(b).

Companies typically achieve exemption under Rule 16b-3 by ensuring that the grants are approved by a committee of two or more nonemployee directors. Most companies will want to keep this approval process in place for grants to Section 16 insiders. Where this is the case, the delegation of authority should be limited to grants issued to non-Section 16 insiders.

Additional Considerations

Wilson Sonsini has published a client alert that does a great job explaining the intricacies of the amended law and covers a number of practical considerations. The authors caution that, while the new flexibility may be welcomed by some companies, not all companies will want to take advantage of it.

Where companies want to delegate authority to approve grants to management, the authors present a list of important questions to consider, including the following:

• How often will the board or compensation committee review and renew the delegation of authority?
• For which employees (e.g., worldwide or only certain localities) and purposes (e.g., new hire, merit, spot awards) will management be authorized to approve grants?
• In addition to imposing a limit on the aggregate number of shares management can approve for issuance under awards, should limits be established over the size of individual awards?
• How often will grants be approved? On an ad hoc basis or on a set schedule? Can grants be approved during closed trading windows?

The timing of grant approvals could be of particular importance in light of the SEC’s guidance on spring-loading. Grants that are approved in advance of announcements of material information could be costly for the company, as explained in the feature article in the Winter 2022 issue of the NASPP Advisor. Establishing a regular cadence for grant approvals can help mitigate this risk.

Finally, I would be remiss if I didn’t mention pay equity considerations. Whether the board or management is approving grants, processes should be in place to ensure that decisions are made fairly and are reviewed regularly for patterns that might indicate unconscious bias. If updating your grant approval process to take advantage of the flexibility afforded under Delaware’s laws, make sure to preserve any controls that exist for this purpose and evaluate whether additional controls are necessary.