The NASPP Blog

November 18, 2008

Post-Dated Terminations

In today’s blog, I take a look at an issue that plagues most stock plan administration departments: late notification of terminations.  It’s a fairly common scenario that can cause numerous problems:

  • Additional shares may have vested after the employee terminated but before you were notified of the termination and the shares may have already been exercised or released to the now former employee.
  • The notification may be so late that you don’t receive it until after the post-termination exercise period should have ended, again allowing the former employee to exercise shares he or she wasn’t entitled to.
  • The notification may be delayed past the end of fiscal period, making the stock plan activity and expense reported for that period incorrect.  Once the termination is entered into your database, with the correct termination date, it creates discrepancies between your beginning and ending balances for the fiscal periods the notification spanned.

Now that you’ve received the late report, what should you do about it?  If the former employee hasn’t received shares that he or she wasn’t entitled to, the solution is generally to enter it into the database just as you would have if you had received the notice on time, making a note of it in your records so you can account for any discrepancies the cancellation subseqently causes in reports. 

Where the former employee has received shares that he or she wasn’t entitled to, either through an option exercise or release of award shares, the ideal solution is to rescind the transaction and recover the shares from the employee. This is easier to do if the shares haven’t been sold yet, but even if they have been sold, it may be possible to break the trade.  If there is a loss on the broken trade, you’ll need to decide whether to absorb it or try to collect reimbursement from the former employee for it (unless you can convince your broker to absorb it). 

It may be tempting to just let it go–what’s a few shares, after all?  But chances are, this won’t be an isolated occurence; in my experience, even the most well-run stock plan administration departments have to address this issue occasionally.  How you handle one termination can set a dangerous precedent.  And in the current environment, it might not be the sort of thing you want to have come to light later on down the road–does the word “backdating” ring a bell? 

More significantly, you, your manager, or even the company’s general counsel, may not have the authority to let it go.  Allowing the former employee to keep the shares he or she wasn’t entitled to is tantamount to modifying the award.  Generally, modifications of vesting provisions have to be approved by the compensation committee, the board of directors, or at least a member of the board.  Even under Delaware law, where authority to approve option grants can be delegated to an officer who is not a board member, I don’t believe the same flexibility applies to vesting provisions; those still have to be approved by a board member. 

Where the decision to allow the former employee to keep the shares is duly approved, it should be accounted for as a modification.  It is essentially an acceleration of vesting, so the company will recognize incremental cost equal to the current fair value of the additional shares the employee received (the company would still reverse any previously recognized expense associated with the unvested portion of the award as it existed before the modification).

For a few missed terminations here or there, the accounting consequences most likely aren’t material.  But if this is a regular pattern, the expenses could start to add up.  In addition to addressing the situation at hand, it’s smart to determine the cause of the late notification and take steps to prevent it from happening in the future.  If you have a specific payroll group that is an ongoing transgressor, schedule a meeting to discuss the problem and come up with a resolution that works for everyone.

Now that I’ve talked from a thereotical perspective about about how these situations “should” be handled, next week I’ll blog about what I learned when I talked to actual stock plan administrators in the real world about their companies’ procedures for late notifications of terminations. 

New Date for Section 16 Webcast

Just announced, our popular annual Section 16 Q&A webcast with Alan Dye has been rescheduled for February 3.  Mark your calendars now and make sure you renew your NASPP membership before then, so you don’t miss it.

Reason #2 to Renew Your NASPP Membership: New Search Function Powered by Google

Since I joined the NASPP back in 2004, members have told me how hard it is to find articles on the NASPP website.  We’re taking steps to fix that, including adding the portals you now see on the home page, which serve as an index to the site.  This summer we updated our search function to use Google technology and I think it works much better than our old search function.  Just last week I was looking for the Rev. Proc. that exempts brokers from issuing a Form 1099-B for certain stock option exercise and sale transactions.  I couldn’t remember the Rev. Proc. number or when it was issued, but I knew it was somewhere in the vast NASPP Document Library.  So I typed “1099-B” into the search box at the top of the page, hit the Go button, and there it was, sixth article listed in the search results (followed immediately by an alert we posted on the same topic)–I didn’t even have to scroll to find it. 

If you haven’t tried our new search function, check it out today.  I’d love to hear from you as to whether or not it finds the articles you are looking for.

NASPP “To Do” List

We have so much going on here at the NASPP, it can be hard to keep track of it all, so I’m going to keep an ongoing “to do” list for you here in my blogs. 

– Barbara