The NASPP Blog

For today’s blog entry, Matthew Johnson of Sidley Austin discusses guiding principles that can be applied when mistakes are made relating to stock compensation.  Matthew will lead the panel, “Oh No! Equity-Related Mistakes and How to Prevent and Fix Them,” at the 19th Annual NASPP Conference. 

Oh No! Equity-Related Mistakes and How to Prevent and Fix Them (When You Can)
By Matthew E. Johnson, Sidley Austin

We all know the feeling–your heart starts beating fast, and you feel dizzy and become short of breath. From out of nowhere, it has dawned on you that a mistake has been under your company’s equity plan. The error was something that could have been prevented, and might be blamed on you and your colleagues. To make matters worse, the error might relate to an equity award held by one of the company’s most senior executives!

Equity plans and other executive compensation arrangements are subject to increasingly complex regulatory requirements and shareholder scrutiny. We wrestle daily with securities law requirements, complicated tax rules, ISS scrutiny, accounting implications, stock exchange listing requirements and ambiguities in plans and award agreements.

In addition, we are all expected to operate consistently with the speed of email, and we depend on communication from a number of sources, which is often far from clear. It is no surprise that mistakes are made routinely in the administration of equity plans and awards.

We must remember that everyone makes mistakes and that, regardless of the consequences, we must focus on the best path of resolving the problem. Criminal and other serious sanctions are imposed on employees who commit fraud, not on those who make innocent mistakes and do their best to remedy them.

At the 19th Annual NASPP Conference in November, I will join John Kelsh (Partner, Sidley Austin LLP) and Rich Robbins (General Counsel and Corporate Secretary, Morningstar, Inc.) in discussing specific, real-life scenarios that seem to plague plan administrators with some regularity. However, there are certain guiding principles that apply generally when addressing a mistake under an equity plan or award:

• Once you have gathered all the facts and determined the scope of the problem, talk to legal counsel (internal, then external) to develop a correction plan.
• Be realistic about the potential consequences–your superiors would rather be disappointed now than surprised later.
• With the help of legal counsel, determine whether the company has a reasonable position to take that in fact there was not an error–weigh the strength of the arguments, the potential exposure and the correction alternatives.
• Be sure that communications relating to the issue are confidential–communication with counsel will be privileged, but keep in mind that other external communications may be discoverable in the event of litigation.
• If corrective action is necessary, consider all legal and ethical alternatives, taking into account SEC disclosure, tax consequences, accounting consequences, investor reaction and corporate expense.

More importantly, invest the time now to establish policies, procedures and systems that will allow your company to avoid or reduce the likelihood of error.

We hope you will join our presentation of “Oh No! Equity-Related Mistakes and How to Prevent and Fix Them,” and look forward to seeing you in San Francisco!

Don’t Miss the 19th Annual NASPP Conference
The 19th Annual NASPP Conference will be held from November 1-4 in San Francisco. With Dodd-Frank and Say-on-Pay dramatically impacting pay practices, you cannot afford to fall behind in this rapidly changing environment; it is critical that you–and your staff–have the best possible guidance. The NASPP Conference brings together top industry luminaries to provide the latest essential–and practical–implementation guidance that you need. This is the one Conference you can’t afford to miss. Don’t wait–the hotel is filling up fast; register today to make sure you’ll be able to attend.