The NASPP Blog

Grant agreement distribution has become streamlined and simplified with the advances we’ve made in electronic processes. It seems we’ve got the distribution part covered. The part that seems a bit up in the air is the question of what happens if the grant agreement is not signed by the recipient? In today’s blog I’ll explore the issue and offer up my favorite solution.

Yes, Acceptance is Important

There’s a lot of investment that goes into creating grant agreements – some companies are investing thousands of dollars into customizing agreements to jurisdictional requirements, ensuring that agreements are relevant and comprehensive. Ultimately, the intent of the agreement is to inform that participant and protect the company. It seems most companies get this – 76% of respondents in our 2011 Stock Plan Administration Survey (co-sponsored by Deloitte) stated they require acceptance of grant agreements. Hopefully we’re all on the same page about the importance of these agreements, and the need to capture the recipient’s acceptance of the terms and conditions.

Simple for Options, Sticky for Awards

The collection of stock option agreement signatures should be fairly straightforward. Whatever policy your company adopts in this area, it’s relatively easy to enforce, because you have control over the participant’s ability to exercise their stock options. If the company wants to restrict the ability to exercise until the signed grant agreement is on hand, it can do so. The exercise of an option is not an automatic event – it must be initiated. If a participant initiates an exercise without a signed grant agreement on file, the company can simply block that transaction (often via predetermined settings with their third party vendor) from occurring until the agreement has been accepted.

Where things can get sticky is with award acceptances. The challenge is that the vesting of an award is automatic – either based on satisfaction of a service period or some type of performance condition. Unlike stock options, there’s nothing to initiate – the vesting event just happens, triggering income and taxes in many jurisdictions. If the agreement hasn’t been signed by the time the award vests, what should the company do?

We had a great webcast on this topic back in January 2013. If you’re a company muddling through this dilemma, it’s worth a look at the transcript or playback. That webcast offered up several options to the award acceptance conundrum. Today, in the interest of time and space, I’ll just pick my favorite to explore.

You Snooze, You Lose

First, let me just clarify that I haven’t seen an enforcement method for award agreements that is perfect. By perfect I mean without risk or some complexities. That said, I’m a fan of adopting a policy that requires acceptance within a specified period (e.g. 30-90 days) and then canceling the award if it hasn’t been accepted in the first place.

Canceling grants for non-acceptance was once viewed as an ultra-conservative penalty. However, in recent years, we’ve seen this emerge as an increasing trend, and I believe it will eventually emerge as a best practice. In a 2011 NASPP Quick Survey, 22% of companies reported using this approach.

I like this approach for many reasons. First, it’s pretty straightforward to administer. The grant is just canceled if not accepted within the proper time frame. It also eliminates 409A issues that are front and center in some of the alternatives (e.g. delay releasing shares until the agreement is signed). Since the award is canceled, there is no concern about the timing of share delivery – the shares no longer exist. There are no major accounting concerns – the expense under ASC 718 would be accrued just like any other RSU. The key accounting question with this approach is what to do if the award is canceled, and the answer depends on whether the company is using the board approval date as the “grant date” or deferring the grant date until the date the agreement is signed. In the latter scenario, the company might be able to argue that there was never a grant. In the former scenario, the company would accrue expense just like any other RSU, but note that it’s unlikely any of the already recognized expense would be reversed upon cancellation.

Companies who consider this approach do need to be aware of the impact this may have in jurisdictions outside the U.S. Some locations do tax awards at grant (either employee or employer), and those taxes may not be recoverable if the award is subsequently canceled. In addition, a robust communication and follow up plan is a must, because the last thing you’d want is an executive who realizes the “mistake” in canceling his grant and asks for a reversal of the cancelation. If the company doesn’t comply with the request, it’s possible that there may be litigation. As with any policy, there are other considerations as well – but these are the major pros and cons.

My guess is that with the threat of cancelation, most employees will pay attention and accept their agreement terms before the deadline. Companies who have adopted this method report few cancelations. It’s definitely worth considering if you are exploring ways to enforce your grant agreement acceptance requirements.

-Jennifer