The NASPP Blog

In December 2013, I blogged about a mistake that garnered public attention when daily deal website Groupon exceeded their plan’s limit for shares granted in a calendar year with an RSU award to their Chief Operating Officer (“Share Limit Lessons the Hard Way“, December 19, 2013). Just when I started to think it couldn’t happen twice, nearly a year to the day of my first blog another oops! occurred. This time it involved technology company Advanced Micro Devices (“AMD”).

In an 8-K filed with the SEC on December 29, 2014, AMD disclosed that they’d exceeded their equity plan’s limit on shares granted to an individual in a calendar year when issuing a series of awards to their new Chief Executive Officer. As a result of the technical error, the chipmaker decided to void and rescind most of the CEO’s newly issued awards. In their evaluation of the situation, AMD’s board of directors affirmed that the value of the CEO’s compensation package that included the awards was appropriate and in line with shareholder interests. Given that some of the awards were negotiated as part of an employment contract with the CEO, I wonder how the company now will deal with the fact that they can’t issue the grants that were contractually promised to the CEO. I’m no lawyer, so I’ll throw the question out there with no intention of trying to answer it myself. AMD did mention in their filing that they intend to “return Dr. Su’s equity compensation to the level it should have been prior to the action to void and rescind the equity awards described above at or near the earliest practicable opportunity available to the Company, subject to law and the terms of the 2004 Plan.”

How Does This Happen?

There’s been no information on “how” the oversight occurred, and I wouldn’t expect that we’d be privy to the specifics. The fact is that it happened. What stands out to me in this case is that, just like the Groupon case, the violation of the plan limit appeared unnoticed until AMD’s own shareholders filed a lawsuit over it. I’m thinking about all the checks and balances in a grant approval process, and wondering how it was left to shareholders in both cases to catch the mistakes.

While plan share limits seem on the surface to be a simple concept to embrace, there seems to be a trend, or at least a pattern in oversights of these limits. I’m guessing there are more situations like this that are caught before shareholder lawsuits occur. A common trigger for awards that exceed the limits outlined in the plan appears to large grants (or a series of grants) to executives or key employees.

Takeaways

We hear more and more about shareholders looking for prime litigation opportunities. As a group, they definitely have become more assertive in monitoring disclosures and finding opportunities to litigate perceived wrongs. With that in mind, I turn the focus to what we can learn from these high profile, public mistakes. I put myself in the position of asking “If I worked for this company, what would I do to avoid this in the future?” A few ideas come to mind:

• Use these examples (AMD and Groupon) as the basis to have a training session or discussion with your internal Human Resources (HR) executives. Since the HR executives are typically the ones involved in discussing CEO and other executive compensation with the board, go right to those executives and educate them on any share limits (and other parameters) within the plan that may be triggers for violations of plan terms. If external compensation consultants are also in a position to have discussions with the Board on executive compensation decisions, it’s a good idea to make them aware of the plan limits as well.

• Audit, audit, audit. Even if an oversight occurs at the HR/board level, the next stop should be the plan administrator. Anytime new grants come through, it’s best to have a check and balance in place that compares those grants to plan limits. Keep a running total of grants to date (whether it’s year to date or some other measurement outlined in the plan). Remember there are varied types of plan limits. Common limits include the number of shares that can be granted to an individual in a calendar year, the number of shares that can be cumulatively granted from the plan in a calendar year, and limits on the number of shares related to certain types of awards that can be made within a period of time (for example, a cap on the number of shares that can be issued as full value awards in a calendar year).

• Advocate for contact with the board of directors. While it’s a good step to educate those who are in contact with the board (HR executives and compensation consultants), why not see if you can gain your own opportunity to educate the board? Whether it’s in person or via a  communication that is presented to the board, this may be an opportunity to go straight to the decision makers. Even if it’s not the full board, the Compensation Committee of the board is an ideal target for these communications.

Nobody wants their mistakes made public. And, while there may not be a sole person responsible for the oversights at Groupon and AMD, these certainly were preventable mistakes. I hope this will be my last blog on this topic and companies will take to heart the importance of monitoring any and every aspect of the terms of their equity plans. Let’s not leave it to shareholders to discover the next mistake.

-Jennifer