The NASPP Blog

A little blurb in the Wall Street Journal blog caught my eye this week. As it turned out, daily deal website Groupon had to rescind a portion of a restricted stock unit award to its Chief Operating Officer because the award exceeded a plan limit on share issuances to an individual – by 200,000 shares. I’ll cover the topic and the associated lesson that we need to reconcile, reconcile, reconcile awards and grants against all of the limits established in a plan.

What Happened?

In January 2013, Groupon’s COO was granted 1.2 million shares under a restricted stock unit award. From their own account in an 8-K filed with the SEC, the award exceeded a then-in-place 1 million share calendar year per person limit on awards – meaning the COO’s award exceeded that limit by 200,000 shares. It appears the error was not detected until a deep dive into the plans was done in conjunction with shareholder litigation. As a result of the discovery, Groupon rescinded the portion of the grant that exceeded the limit – 200,000 shares. This occurred just days before a portion of the award was scheduled to vest.

The Good News

The good news is that the error was detected in advance of shares vesting/sold. Had the shares vested and subsequently been sold, this would have made the situation more complicated to rectify. Even if not sold, had taxes been collected and the error gone unnoticed, the correction of the tax withholding could have gotten very complicated. Aside from the fact that the error was caught in advance of the vesting date, I can’t really think of any more “good news” in this situation.

The Bad News

This leaves me wondering how the error – for such a sizable, high profile grant – was not detected earlier. It seems to have gone unnoticed during quarter close and other periods where reconciliation seems to be likely. In fact, it appears that nearly a year went by without a blip on the stock plan radar. In addition, the correction involved public disclosure – another negative in this situation.

What Did We Learn?

Anytime there’s a negative involving errors and public announcements, I think it’s a prime opportunity for us to seek the lesson to be learned. In this case, this is a solid reminder that reconciliations need to extend beyond overall plan balances. It’s not enough to stop your analysis at the overall outstanding plan balance at the end of the quarter (which usually reflects beginning balance, plus any shares returned to the plan and minus any issuances). If your plan has internal limits on share types, maximum shares per award, or overall grants within a period of time, these parameters must be audited regularly. Examples of common limits within stock plans may include:

• Limit on shares granted per award type: for example, no more than 3 million shares may be granted as restricted stock awards/units.
• Limit on shares granted per option/award: for example, a grant to any individual cannot exceed 1 million shares.
• Limit on shares granted within a specific window of time: for example, no more than 2 million shares in a calendar year.

If you have any of these types of share limits within your plans, you’ll want to ensure you are comparing grant and award activity to these limits. Ideally, this should initially be done at grant, and then double checked during the monthly or quarterly reconciliation process that follows. Year-to-date reconciliations should always be performed with each reconciliation process – in addition to the current month or quarter’s activity.

Groupon is probably not thrilled to publicly correct an award. However, the silver lining is the message in this for all of us – that monitoring plan share limits regularly and consistently is important. If you haven’t performed these reconciliations for 2013, you may want to do so now. Correcting errors that cross calendar years can often be tricky – or sometimes impossible, especially if a disposition of the shares is involved.

-Jennifer