Extend Your Share Reserve with Inducement Grants

Since the Tax Cuts and Jobs Act made all forms of equity compensation subject to Section 162(m), I’ve blogged periodically about the advantages of no longer having to qualify equity awards for the exemption that used to exist for performance-based compensation. In his blog on CompensationStandards.com, Mike Melbinger recently pointed out another silver lining to the new Section 162(m): there are now fewer drawbacks to inducement grants.

What Are Inducement Grants?

As I’m sure most of my readers are painfully aware, it is virtually impossible for public companies to issue equity awards outside of a shareholder-approved plan. One significant exception to the shareholder approval requirement is inducement awards. These are awards that are granted to convince prospective employees to work for the company. Under both the NYSE and Nasdaq listing requirements, these awards are not subject to shareholder approval. 

Why Think About Inducement Grants Now?

Back when Section 162(m) included an exception for performance-based awards, one requirement to qualify for the exception was that the awards had to be granted from a shareholder-approved plan. Now that 162(m) no longer has this exception, inducement awards are no less tax advantageous for the granting corporation than any other awards.

What Qualifies as an Inducement Award?

Sadly, you can’t just say that all your awards are inducement grants and be done with shareholder approval. There are some requirements that must be met. Here’s how Mike describes the requirements in his blog:

To qualify as an inducement award, other requirements must be met:

• The inducement grant exception is only available for someone joining the company as a new employee, or someone who was previously an employee or director but is rejoining the company following a bona fide period of nonemployment.  The exception is not available to induce an individual to join the company as a nonemployee director, consultant, advisor or independent contractor.
• The award must be a material inducement to the individual accepting the job. That is, the company must communicate the award terms prior to job acceptance as part of the hiring process.
• The independent directors must approval the award.

Mike notes that there are some other Ts to cross and Is to dot, most notably the award must be disclosed in a press release, the company must provide written notice of the award to the exchange where it is listed, and there are some securities law considerations (e.g., the award won’t be covered by the Form S-8 filed for the company’s stock plan). But the changes to Section 162(m) remove a significant obstacle.

Extending Your Share Reserve

Inducement awards are often some of the largest equity awards grants, especially when they are granted to the company’s senior and highest paid executives (for example, see Mattel’s disclosures about their CEO pay ratio, which I recently blogged about).  Not having to reduce your shareholder-approved share reserve for these grants could make a difference in how long the reserve lasts.

- Barbara