Do Employees Have to Accept their Equity Grants?

A question I am asked frequently is whether companies have to require employees to separately accept their grants. In this blog entry, I address this question, discuss ways of enforcing grant acceptance policies, and whether spousal consent is necessary as well.

Equity Grant Acceptance: The Legal Requirement

The short answer here is that there is no legal requirement that employees (or other grant recipients) accept their grants (at least not in the United States, laws outside the US can vary—consult your advisors). Companies could simply notify employees of their equity awards and not require any acknowledgement whatsoever from recipients. In fact, 7% of respondents to the 2023 NASPP/Deloitte Tax Equity Administration Survey indicate that they do not require employees to consent to their awards.

Why Bother Requiring Grant Acceptance?

Given that there isn’t a legal obligation for companies to require employees to accept their grants, you might be wondering why the remaining 93% of respondents to the 2023 survey bother with requiring acceptance. They do so not because it is legally mandated but to protect the company in the event that there is a dispute over the terms of the award.

If an award holder challenges the terms of the award at some point, the company is in a much better position legally if they can show that the award holder agreed to the terms of the award. There are many cases where having that signature has been a key factor in companies prevailing in disputes with employees, often high-stakes disputes. It's not a guarantee—for example, sometimes there are disputes as to what the language that everyone agreed to means—but a signature goes a long way towards protecting the company.

How Do Companies Enforce Grant Acceptance?

Over three-fourths of respondents to the 2023 survey require employees to separately acknowledge acceptance of their equity awards. Here are some of the approaches they use to ensure compliance with this policy:

• Employee Education: Educating employees to help them understand the value of their equity awards can go a long way towards improving grant acceptance rates.
• Follow-Up: I call this the “harassment method.” Under this approach, companies follow up with participants repeatedly until they accept or decline their awards. This might include a series of emails and even phone calls. As a last resort, the stock plan administrator might have HR or employees’ managers follow up as well.
• Suspension of Exercise/Vesting: Some companies suspend the ability to exercise options or vesting in awards until participants have accepted their awards. This approach can work great for stock options but can be problematic for full value awards. To avoid a costly Section 409A violation, RSUs typically must be paid out no later than two and half months after the end of the calendar year in which they vest, regardless of whether the recipient has accepted the terms. Restricted stock could be taxable on the original vest date, even if the recipient hasn’t accepted the award and the shares aren’t released at that time.
  
• Cancellation of Awards: Some companies cancel the awards if they aren’t accepted within a specified time frame.

See the NASPP Data Snapshot on “Grant Acceptance Policies” for data on how common the above policies are.

What About Deemed Acceptance?

Under a deemed-acceptance policy, the company assumes that participants accept their awards if they aren’t rejected within a specified time period. Only 14% of respondents to the 2023 survey have a deemed acceptance policy.

The problem with deemed acceptance is that, if there is a dispute over the terms of the award, there may be no way for the company to prove that participants were aware of the policy or that they understood and accepted the terms of their award. It provides essentially the same protection (or lack thereof) to the company as not requiring acceptance. This approach can also inadvertently encourage employees to not accept their awards because they know that their acceptance will be assumed if they don’t reject them.

What About Spousal Consent—Is That Required?

Another question that comes up around acceptance is whether it is necessary for employees’ spouses to accept the equity awards granted to employees, in addition to the employees’ acceptance. In my experience, most companies don’t require this (it’s usually hard enough to get employees to accept their awards) but some companies do. Here’s why.

In community property states any compensation paid to married employees during the period of their marriage belongs equally to both the employee and his/her spouse (as I understand it—I am for sure not an expert in family law). When you grant an award to a married employee in a community property state, that award also belongs to the employee's spouse and the spouse might be able to argue that he/she has certain rights to the award. Thus, some companies want spouses to sign the agreement as well, as a further measure of protecting the company in the event of a dispute.

What Is the Deciding Factor for Grant Acceptance Policies?

A company's position on requiring grant acceptance is likely dependent on several factors:

• How conservative they are and how concerned they are about litigation.
• How conservative their legal advisors are.
• The terms of the award agreement itself. If the agreement includes terms and conditions that are controversial or are difficult to enforce (such as clawbacks), companies might be more concerned about recipients (and possibly even their spouses) accepting the awards.
• How high the stakes are. For awards to executives, which are often very sizable, a company might be more concerned about recipients (and possibly even their spouses) accepting the awards than they are for awards for only a few shares granted to low ranking employees.