Issuing Equity Awards: Administrative Issues to Consider

The process of making stock grants doesn’t vary much based on the reasoning behind the grants. Retention grants made during a chaotic climate aren’t much different than a company’s annual grants when it comes to ensuring proper compliance and administrative steps are followed in issuing the awards. As such, regardless of grant timing or reason, there are items you'll want to make sure are on your grant checklist.  

A blog by Anthony Eppert of Hunton Andrews Kurth explores select administration issues to consider in making equity awards.

 

• "Verify the Equity Plan’s Share Reserve Not Exceeded.  With respect to the upcoming grants, the Company will need to verify that the equity plan’s share reserve will not be exceeded.  This has two parts.  First, to the extent the equity plan has liberal share counting, the Company will need to track equity grants (which are a subtraction from the share reserve) AND track forfeitures of equity awards (which are an addition to the share reserve).  Second, the Company should determine whether a sufficient number of shares would exist if the outstanding performance awards were settled at their maximum levels (i.e., some companies only track share counting of performance-based awards at their target levels)."

 

• "Verify Compliance with Any Holdover 162(m) Sub-Limits.   Prior to the Tax Cuts and Jobs Act (“TCJA“), most equity plans of publicly-traded companies contained share grant limitations that were intended to comply with the performance-based exception to the $1mm deduction limits under Section 162(m).  These were typically structured as an individual and annual limit.  Though TCJA eliminated the performance-based exception, a number of equity plans have retained such limitations as “good governance.”"

 

• "Verify Compliance with any Requirement that the Equity Award Contain a Minimum 1-Year Vesting Schedule.   As background, part of the “plan features” pillar of ISS’s equity plan scorecard (“EPS“) is that a certain number of points are allocated if the issuer’s equity plan has a requirement that at least 95% of the share reserve is granted with a minimum vesting schedule of 1 year.  If applicable, the 5% carve-out should be tracked.  For example, often grants of equity to non-employee directors are made in arrears (i.e., payment for services previously performed), and as a result, these grants are issued to directors fully vested.  Such grants will work to deplete the 5% carve-out.""

Additional items covered include verifying share reserve and "natural person" status for Form S-8 and compliance with director sub-limits, all of which are described in Eppert’s blog.

The current economic climate has some companies considering grants aimed at retaining their employees. Consider adding the above listed points to your annual grant checklist. In addition, review your checklist relative to remote working situations. Some things to evaluate are:

• Does your current checklist say that there is a monthly meeting in which grants will be approved? Is that meeting still happening on cycle?

 

• Is the meeting now virtual and follow up in writing will be required to ensure documentation of proper approval?

 

• Are there contingency plans for making grants if designated approvers are not available to approve grants?

 

• Will extra time be needed to secure proper documentation of approval given remote schedules and locations?

While the concept of granting an award hasn’t changed, the proper steps to issue the award should be reviewed in light of current workforce operations and adjusted accordingly.