Today’s CompensationStandards.com blog points readers to a handy chart of “Problematic Pay Practices – as Identified by ISS” published by ExecutiveLoyalty.org. Since there are several that stem from equity compensation practices, I’ll recap some of them.
Avoid These Practices or Risk a Negative ISS Vote
While there were several compensation practices identified, only some of them apply to equity compensation. They include:
- Repricing or replacing of underwater stock options/stock appreciation rights without prior shareholder approval (including cash buyouts, option exchanges, and certain voluntary surrender of underwater options where shares surrendered may subsequently be re-granted).
- Stock plans with a liberal CIC definition (e.g. low % or occurrence before CIC closing) coupled with single trigger vesting upon the CIC “are likely to receive a negative recommendation” (FAQ #63).
- Equity plans or arrangements that include a liberal CIC definition (such as a very low buyout threshold or a CIC occurring upon shareholder approval of a transaction, rather than its consummation), coupled with a provision for automatic full vesting upon a CIC, are likely to receive a negative recommendation. [FAQ 59]
- Excessive reimbursement of income taxes on executive perquisites or other payments (e.g., related to personal use of corporate aircraft, executive life insurance, bonus, restricted stock vesting, secular trusts, etc; see also excise tax gross-ups above.
I don’t think any of these come as a particularly big surprise – but it’s helpful to see the most likely hot button practices wrapped up into a handy chart for reference. As ExecutiveLoyalty.org points out, “on at least an annual basis, those who make executive compensation decisions for public companies should “score” their practices against ISS and other policy guidelines.”
-Jenn
Here’s what’s happening at your local NASPP chapter this week:
San Francisco: The chapter hosts Aspirations Fling with Stock & Option Solutions. Kathryn Randall and Carol Rose-Guerin of Stock & Option Solutions, along with Wendy Jennings of AppDynamics present “Private Company vs. Public Company- What Changes are Coming?” (Tuesday, July 12, 11:30 a.m.)
Boston and Connecticut: The chapters host the 8th Annual New England NASPP Regional Conference, featuring presentations on leadership skills, tax myths and facts, ESPPs, payroll, and TSR award valuation. (Wednesday, July 13, 8:00 a.m.)
New York/New Jersey: Andrew Schwartz of Computershare present “Taxation of Equity Awards: Myths and Facts.” (Thursday, July 14, 8:30 a.m.)
Twin Cities: Rive Rutke and Mary Rathert of Deloitte Tax present “Employment Tax and Equity: U.S. and international employer tax obligations for various types of equity compensation.” (Thursday, July 14, 8:00 a.m.)
Tags: NASPP chapter meetings
I recently had to update my EDGAR passphrase. I thought this would be a relatively simple process. I’m a smart person and I have a proven success rate in navigating government websites—I know how to use the DMV website to make an appointment, I’ve requested a certified copy of my birth certificate online, I can find a public company’s stock plan on EDGAR—how hard could it be to update my EDGAR password? Turns out, way harder than I expected.
This is a long blog entry, but it’s not my fault. I blame the SEC (and maybe Microsoft).
How I Got Into this Mess
I got my EDGAR access codes over a decade ago, back when the SEC first rolled out the system for filing Section 16 forms online. It was so long ago, it was before the SEC required a notarized Form ID or a passphrase. I did not want to go through the hassle of submitting a notarized form to the SEC, so I had a system in place to make sure I didn’t forget to update my EDGAR password, which consisted of a reminder in my Outlook calendar set for about a month before my EDGAR password expired. Once a year, the reminder would pop up and—unlike how I respond to my alarm clock—I would not ignore it or hit snooze. I would immediately update my EDGAR password and set the reminder for the next year.
This system worked fantastically for over a decade, including through a change in employers. And then I got a new laptop with Outlook 13 on it. Outlook 13 had some sort of “known issue” that caused emails to disappear from my inbox. The only way to fix it was to remove Outlook 13 and go back to Outlook 10. In the process, my entire calendar was lost. Completely gone.
After massive hyperventilating and gnashing of the teeth, I was able to recreate most of it, but there were some appointments I forgot—including the reminder about my EDGAR password.
Fixing an Expired EDGAR Password
To update an expired EDGAR password, you have to generate a new set of EDGAR codes. This requires a passphrase. I had no idea what my passphrase was because the passphrase system wasn’t in place when I originally got my EDGAR codes, hence I didn’t have it noted in any of the various places where I have made note of my EDGAR codes (this was regrettable on my part). Here’s what I needed to do:
1. Generate a new passphrase. This required me to submit an Update Passphrase Confirmation form, which has to be notarized. I thought getting the notarization would be hard, and it was, mainly because I kept forgetting to bring the form with me when I met with my notary friend who would notarize the form for free.
This part was also very confusing because the only way to get the Update Passphrase Confirmation form is to fill out an online request for a new passphrase. But the SEC won’t issue a new passphrase until the notarized form is submitted, so I would have to come back and complete this very same online form again once I had my notarization. Essentially, you complete one new passphrase request that the SEC completely ignores. Then, once you have your notarized form, you complete a second request that the SEC will act on if you can manage to submit your notarized form properly (see steps 2 to 5).
Finally, to add to my frustration, it took several tries to come up with a passphrase that would meet the SEC’s crazy specifications so that I could print the form that I had to have notarized. (Note to the SEC: a password that is so complicated to remember and so hard to update that you write it down in multiple places it is a total security fail.)
2. Months later, after I finally got the form notarized (access to EDGAR isn’t really a pressing concern for me on a day-to-day basis), I had to go back to EDGAR to submit the form.
3. Of course I first tried this after 7:00 PM Pacific (I am in California) and EDGAR is shut down for the night at that time. Despite how ridiculous this is for an online system, it shouldn’t have been a surprise; as soon as I got the error message, I remembered that EDGAR shuts down for the night.
4. The next day I thought I was all set. I had my form and it was between 3:00 AM and 7:00 PM Pacific. Thankfully, the EDGAR system let me use the same passphrase I had come up with after several tries in step 1, so I didn’t have think of another one. But I still made every error in the book before I could submit the form—my file name was too long, then it had spaces, then it had capital letters, then my reason for needing to update my passphrase was too long, then it included profanity (just kidding, I did not swear at the SEC, at least not in writing).
5. After several tries, I finally managed to submit my update passphrase request form without getting an immediate error. I took this to be a good sign, even though there was no way I could tell that the submission had succeeded, since I got the same “submission completed” screen that I got when the submission failed.
6. Then I waited. After two business days, I received an email that my request to change my passphrase had been accepted. This was a major hurdle overcome, but I still had to go in and generate my new EDGAR codes.
7. Guess what time it was when I tried generate my new EDGAR codes: yep, after 7:00 PM Pacific (this is one of my most productive time periods). So I set an appointment in my calendar to remind me to generate my codes before 7:00 PM the next day (no worries about me trying to generate them before 3:00 AM).
8. The next day, my reminder pops up and I go to generate my new EDGAR codes. After all this, I am positively holding my breath that I wrote down my passphrase correctly because I sure as heck didn’t want to have to start this whole process again. Luckily, I am at least competent in this one thing, because the passphrase worked and I finally have my new EDGAR codes. Phew!
Lesson Learned
You might think the lesson I learned is to not let my EDGAR password expire, but that isn’t it all. The lesson I learned is …
Don’t forget your EDGAR passphrase!
If I had just remembered my passphrase, this whole blog entry could have been avoided. Maybe I should rent a safe deposit box or get one of those fireproof safes just to store my EDGAR passphrase.
Wondering why EDGAR is such a hot mess? Check out this nifty podcast that explains the problem with government websites: “DMV Nation.”
– Barbara
Tags: EDGAR, SEC
You may know that one of the (many) mantras of the stock plan administrator is something like “know the terms of your stock plan.” If there was a list of top 10 phrases of advice for a stock plan administrator, I’m pretty sure that understanding all of the various nuances of your company’s stock plan(s) would be there. Interestingly, when many of us think of plan terms, we’re thinking of the really important details, like the number of shares, limits on shares, handling of terminations, death and disability. You get the picture. I’m betting that I’m in the majority (not the minority) in having read a stock plan or two and skimmed over the language that seems fairly standard. Especially the wording that seems to be pretty similar in every stock plan, or, what I call “legal stuff” that doesn’t translate to outright administration responsibilities. Language that is just there. Well, as it turns out, that language is there for a reason and the phrasing of some of those terms could be way more important than one might think.
Waxing Philosophical?
I’m going to start using the word “purpose” now, as in understanding the purpose of your stock plans. I’m not really waxing philosophical, though. If you look at your stock plan, chances are the very first thing you see is a section on the “purpose” of the plan. And it usually goes something like:
“The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, and any Parents and Subsidiaries that exist now or in the future, by offering them an opportunity to participate in the Company’s future performance through the grant of Awards.“
The above is a copy and paste from a real stock plan, available publicly online, that will remain nameless. I think you get the picture, and I’m betting if you look at your own plan’s “purpose,” it will read fairly similar.
So why all this chatter about the purpose of a stock plan?
Intent Does Matter
A recent blog by California attorney Keith Bishop recounts a recent 9th Circuit Court of Appeals ruling involving – you guessed it – the purpose of a stock plan. The plan involved in the case was a stock rights plan, but in terms of plan terms the one in question for this matter is similar to what you’d find in an equity incentive plan. The specifics of the appeals case are described by Attorney Bishop as follows:
Most equity award plans that I come across include a statement of the plan’s purposes. I haven’t tended to give these provisions a whole lot of thought, but an opinion issued yesterday by the Ninth Circuit Court of Appeal makes it clear that a plan’s purpose clause can be very important indeed. The case arose from the retirement of the plaintiff, a Mr. Foster Rich, from Booz Allen Hamilton, Inc. (BAH). While working at BAH, Mr. Rich participated in the company’s stock rights plan (SRP) pursuant to which he was granted the right to purchase BAH shares. When Mr. Rich retired from BAH, he had accumulated 30,500 shares. BAH then exercised its right to repurchase those shares and paid Mr. Rich $4,507,900, or $147.80 per share. That is a lot of money, but a little over a year later BAH sold a portion of its business to The Carlyle Group and holders of BAH stock received $763 per share. Because Mr. Rich was no longer a BAH shareholder, he did not receive any compensation from that transaction. Presumably, Mr. Rich would have received $23,271,500 had his shares not been repurchased. It seems that while Mr. Rich became wealthy under the SRP, he didn’t become nearly as wealthy as others.
Mr. Rich sued alleging breach of contract and Employee Retirement Income Security Act (“ERISA”) claims.
The 9th Circuit did not agree with Mr. Rich and upheld that the plan was not subject to ERISA (more details can be read in that blog). In arriving at their conclusion, they turned to the “purpose” of the plan as defined by the plan, and corroborating actions and communications within the company that further supported the stated purpose. That plan’s purpose was defined as “to provide incentives for [BAH] Officers to continue to serve as employees of the Company and its subsidiaries.” Sound familiar? That’s not too far off from the Equity Incentive Plan purpose language above, right? It appears that, in this case, it was the plan’s own language that played a significant role in helping the 9th Circuit decide to uphold that the plan was not subject to ERISA (and therefore the former employee was not entitled to further gain from the shares post repurchase).
Bishop suggests that this case may be something for companies to consider when responding to item 1(a) on the Form S-8. The choice of words there could be an important factor in helping to clearly define the true intended purpose of a stock plan (“Briefly state the general nature and purpose of the plan, its duration, and any provisions for its modification, earlier termination or extension to the extent that they affect the participants.”) and their corresponding entitlements. This is something for all stock plan drafters to consider. Certainly for those involved in drafting new plans or the S-8 process – even if it’s just reviewing the documents, it’s something to raise as a point of discussion. While your stock plan may not be subject to an ERISA-based challenge, there could certainly be other challenges that arise. That’s why having a clear and solid intention behind all that plan language, supported by administration practices that reiterate and corroborate those intentions, really does matter. It turns out that those many pages of plan terms are important after all.
-Jennifer