The NASPP Blog

November 25, 2008

Post-Dated Terminations–The Real World

Last week I blogged about a common problem that arises in the administration of stock plans: terminations that are reported late.  Sometimes the late notification allows the former employee to receive shares that he or she is not entitled to, for example, if a former employee’s restricted stock award or option vests between his or or last day and when notice of the termination is received by stock plan administration or if the notice is received after the conclusion of the post-termination exercise period.

I recently spoke with a few stock plan administrators about how they handle these “worst case” scenarios. (And I emphasize “few”; this was by no means scientific research).  Everyone I spoke with said that they generally address these matters on a case-by-case basis and frequently require the transaction to be unwound. 

If the shares haven’t been sold yet, unwinding the transaction is relatively straightforward; the company simply requires the employee to surrender the shares. If the shares have already been sold, it gets a little more troublesome.  In this case, the broker would be instructed to “bust” the trade.  What this means is that the broker buys the shares back on behalf of the employee so that they can be surrendered to the company and the employee is required to return the sale proceeds.

In a busted trade situation, it would be highly unusual for the broker to be able to repurchase the shares at the exact price the employee sold them for.  If the broker has to pay more for the shares, then the broker is going to look to the company to make up the shortfall.  Some companies charged the shortfall to the employee, but at least one stock plan administrator I spoke with said that they charged the shortfall to the payroll group that had neglected to report the termination on a timely basis.  This policy was apparently very successful in encouraging timely reports in the future.

One stock plan administrator I spoke said that they view it as the employees’ responsibility to read and understand the terms of their grants; they require employees to indicate that they have done so by signing their grant agreements. Moreover, they specifically include language regarding the treatment of grants upon termination in their FAQs, to provide the company with further leverage for enforcement when a situation such as this occurs.

Most of the plan administrators also indicated that there were sometimes situations where general counsel (or whoever would typically make this type of decision at their company) allowed the transaction to stand. In some cases, the amounts involved were de minimus (a few shares) and it didn’t seem worth pursuing.  In other cases, there may have been mitigating factors or unwinding the transaction may have just been too much of a challenge (e.g., perhaps due to the amount of time that had elapsed).  In the pre-SOX era, companies may have just let the transaction go without further action, but now, in the days of SOX compliance and the post-backdating scandal, most of the stock plan administrators that I spoke with were referring the matter up to the compensation committee if a decision was made to not to pursue cancelling the transaction and accounting for the decision as a modification of the grant. 

While practices in the past may have been looser, based on my conversations with the administrators I spoke with, looking the other way on these transactions just doesn’t fly in today’s enviroment.  These transactions are easily auditable and one of the administrators said that the audit team specifically looked for them.

Reason #3 to Renew Your NASPP Membership

The country guides available in our new Global Stock Plans Portal are easily worth the cost of NASPP membership. I’m not kidding–these guides used to be published in a book that cost at least as much, if not more, than NASPP membership.  Each guide provides an in-depth discussion of stock compensation in a different country. These are very hefty documents–the guide for just the UK is close to 40 pages!  Whatever you need to know about operating a stock plan in these countries, from ESPPs in Hong Kong to qualified plans in France, our country guides have it covered.    

2nd Annual NASPP Webcast on Tax Reporting

On December 9, Robyn Shutak, the NASPP’s Education Director, and I will present our annual webcast on tax reporting, where we answer the tax-related questions you’ve been asking all year long in the NASPP discussion forum.  Former employees, consultants, outside directors, death, divorce…we’re going to cover it all, complete with sample Forms W-2 and 1099.  If you have any questions you’d like to make sure we cover, feel free to email them to me.   

NASPP “To Do” List

We have so much going on here at the NASPP, it can be hard to keep track of it all, so I’m going to keep an ongoing “to do” list for you here in my blogs. 

Happy Thanksgiving!

– Barbara