A Few Days to Save on NASPP Conference
The 23rd Annual NASPP Conference will be held San Diego, from October 27 to 30. Don’t wait any longer to register; the current rate is only available through this Friday, June 5.
NASPP To Do List
Here’s your NASPP To Do List for the week:
It’s not too late to register for the NASPP’s newest online course, Taxation for Stock Compensation: Beyond the Basics. The course started on Tuesday, June 2, but the first webcast has been archived for you to listen to at your convenience.
Register for the 23rd Annual NASPP Conference. Don’t wait—the current price is only available through this Friday, June 5!
I’m sure all of my readers know that Form S-8 is used by public companies to register shares that will be issued under an employee stock plan with the SEC. In it’s January-February 2015 issue, The Corporate Counsel took a closer a look at some of the technical requirements of Form S-8. Here are a few things I learned from the article.
Fee Offsets Are Complicated
Companies wishing to register shares on a Form S-8 must pay a registration fee to the SEC. This fee is based on the value of the stock to be issued under the plan and the total number of shares to be issued. Where shares registered under prior S-8 filings will not be issued, companies can use the fees associated with these unissued shares to offset the fees to file a new Form S-8. But there’s a catch: the offering covered by the S-8 that the fees will be transferred from has to be completed, terminated or withdrawn and the new S-8 has to be filed within five years of when the original S-8 was filed. Because most stock plans have a term of ten years (and the offering isn’t viewed as completed until there are no further outstanding options/awards under the plan), this means that this offset often available. This is covered in the Securities Act Rules CDI Question 240.11.
No Share Offsets
Shares cannot be carried forward from one form S-8 to another. Thus, if shares from an expiring plan (and covered under the Form S-8 filed for that plan) will be transferred to a new plan, the shares have be registered again on the Form S-8 filed for the new plan (and are included in the calculation of the registration fee for the new plan).
New Form S-8 Must Be Filed to Register New Share Allocation
Where shares are newly allocated to an existing plan, a new Form S-8 must be filed to register those shares. They cannot be registered by amending the prior Form S-8 filed for the plan. But, the good news is that a abbreviated format can be used for the new Form S-8. The Corporate Counsel says:
In this scenario, General Instruction E to Form S-8 provides that, for the registration of additional securities of the same class covered by an existing Form S-8 relating to an employee benefit plan, the issuer may file an abbreviated registration statement containing only a cover page, a statement that the contents of the earlier registration statement—identified by file number—are incorporated by reference, the signature page, any required opinions and consents, and any information required in the new registration statement that is not in the earlier registration statement.
Share Counting
I was surprised to learn that it may be not permissible to count share usage for Form S-8 purposes the same way shares are counted against the share reserve. According to the article:
A recommended approach for dealing with forfeited shares is to treat the original restricted stock grant and the subsequent re-grant as two separate issuances for purposes of counting the amount of shares remaining on the Form S-8. But be aware that when counting shares this way, an issuer can deplete shares registered on Form S-8 faster than it depletes the plan capacity shares, so the issuer should keep a separate ledger for both the Form S-8 and the plan share counting. Also note that this approach might be overly conservative for some practitioners who do not believe that the issuer needs to count the forfeited shares as having been issued against the total, particularly with respect to options. There is also a concern that this approach can lead to problems in determining the real share reserve for other purposes, such as for accounting purposes.
The article further notes:
Options and stock-settled SARs should be counted when exercised for the full gross amount exercised (i.e., unreduced for any net exercise or withholding), while stock awards should be counted when granted. For performance stock awards, the conservative approach is that they should be counted at grant for the target number of shares—with any shares actually issued in excess of target counted at the time of issuance.
In this week of Memorial Day we remember and honor our fallen soldiers, spend time with family and friends, and begin the transition to flip flops, long days and endless barbeques. Memorial Day marks the unofficial start of summer. Ah, those dog days of summer. Many of us are day dreaming about beaches, vacations and relaxation. On the professional side of things, this season commences many exciting things here at the NASPP (you’ll have to keep reading to know more about those!). Last week, as we hit the holiday weekend, I couldn’t help but notice many articles with fun facts about the season. So I’m keeping to the lighter side in today’s blog and springing a pop quiz! Test your knowledge of Memorial Day, summer, and equity compensation fun facts.
Get Started! (You don’t need to use your real name – feel free to use an alter ego!)
On the NASPP side of things, if you’re reading this blog, you’ll want to subscribe and stay tuned all summer long, because we start a guest blog series – featuring our popular Meet the Speaker interviews as a prelude to our 23rd Annual NASPP Conference, which includes expert input on a variety of topics. Additionally, we’re heading into the sunny season tackling taxation head on – our Taxation of Equity Compensation: Beyond the Basics course begins next week on June 2nd. The course is only 4 weekly sessions long, so plenty of time to complete it before heading out to your favorite vacation destination. And, even if you are on vacation, all sessions are recorded so you can listen to them later. It’s not too late to register. Why not take advantage of your summer down time to expand your knowledge!
I’m wishing you all a fun, fabulous, relaxing, educational, productive summer!
Taxation of Stock Compensation: Beyond the Basics Starts Next Week
This unique online course will examine questions and solutions for today’s most pervasive tax compliance challenges, including IRS deposit requirements, reporting on Forms W-2 and 1099-MISC, FICA taxes, acceleration of vesting upon retirement, and more. Register today—the course begins next week!
There’s a lot going on at NASPP local chapters this week:
Phoenix: Peter Kimball of ISS presents “Tallying the Score: Reviewing the First Year of ISS’s Equity Plan Scorecard Policy and Other Compensation Trends from the 2015 Proxy Season.: (Wednesday, May 20, 11:30 AM)
San Francisco: Marianne Friebel of Dolby, Ying Long of Cisco, and Marlene Zobayan of Rutlen Associates present “Employee Mobility: We’ve All Heard the Rules, But what Are People Actually Doing?” (Wednesday, May 20, 11:30 AM)
Western PA: The chapter hosts a happy hour networking event. (Wednesday, May 20 5:00 PM)
Philadelphia: Irv Becker and Matthew Kleger of Hay Group and Amy Pocino Kelly and Mims Maynard Zabriskie of Morgan Lewis present “Executive Compensation Challenges for 2015/2016.” (Thursday, May 21, 8:30 AM)
San Fernando Valley: Tara Tays, Paul Gladman, and Justin LaSalle of Deloitte present “How Different Are We? A Look at Long Term Incentives, ESPP and Stock Administration.” (Thursday, May 21, 11:30 AM)
Wisconsin: Nathan O’Connor of Equity Methods presents “What to Expect in 2015 in Stock Compensation.” Thursday, May 21, 11:30 AM)
I will be at the Phoenix chapter meeting; I hope to see you there!
It’s been about 15 years (yikes, already?) since the SEC adopted Rule 10b5-1. For those new to the concept, a 10b5-1 plan may be best explained as a device that allows company insiders to trade in the company’s securities pursuant to a pre-arranged trading plan or instruction. The pre-arranged element is intended to help the insider avoid automatic liability for insider trading and serve as an affirmative defense to claims of insider trading. While there have been many benefits to enacting such trading plans, 10b5-1 plans have not escaped scrutiny from the SEC. I won’t cover that particular scrutiny in today’s blog, but will tackle another unintended downside: the impact of well-intentioned, pre-determined trades on a company’s stock price.
Haven’t We Seen It All?
In recent years we’ve seen the gamete of questionable situations that arise from having a 10b5-1 trading plan. Did the executive really not have material non public information at the time they created the plan? Or, on the flip side, did the executive time that press release to be just before or shortly after the trade already set to occur in his or her 10b5-1 plan? The thing these scenarios have in common are that they raise a question as to whether a specific individual should have indeed been able to trade in the company’s stock, in spite of having a 10b5-1 plan. We could cover a lot of examples of these instances. But today I want to turn to one thing I hadn’t heard of until recently, a circumstance that had nothing to do with the ethics of the trades executed under an individual’s 10b5-1 plan. It appears to be a completely, unintended consequence of the executives and company being well intentioned and yet still generating some ripples about it.
It Started With A Tweet
On February 9, 2015, CNBC’s Jim Cramer sent a memo to the board of social media darling Twitter. The essence? Stop 10b5-1 trades, because the flow of these trades (albeit pre-timed and planned) are hurting the company’s stock price. As CNBC reported, the actual memo said: “Memo to the board of directors of Twitter: Someone suggest that there be a moratorium on selling stock for a bit, maybe six months, maybe a year, to show that you believe in the company… If I were on the board I would simply say, ‘Hey guys, could you give it a break for a while because you are now telling a good narrative about user growth and engagement and you are starting to get people excited again about the company and its stock and your selling makes them feel foolish.’”
The activity that prompted the memo was a series of sales of stock by top executives at Twitter in the weeks and months prior to the memo. Although the trades were done pursuant to 10b5-1 plans, several were executed in close proximity to each other, bringing in millions of dollars to Twitter executives ($8.5 million to its CEO in January and February alone, with a similar amount to its founder and chairman, and $1.8 million to another executive). Although it may be argued that the trades were executed based on long, pre-planned directives, the quantity and dollar value of the shares liquidated seemed to be sending a message that the executives were dumping stock. Not to mention simultaneously releasing thousands of shares into the market.
So what happened? What did the Twitter board do? The company has not commented on the matter, but in a Fortune article citing exclusive information (Exclusive: Twitter execs put stock sales on ice – April 22, 2015), it appears that the memo was received and action taken. Fortune cites having multiple sources who confirm a moratorium on 10b5-1 transactions, save one insider who continues to be permitted to sell stock. Aside from the transactions of that lone insider, no other 10b5-1 transactions have occurred since February 6, 2015. It’s not clear if the company canceled plans or simply did not renew them. Whatever the details, the end results appears to be a moratorium. Since that time, Twitter’s stock price has risen approximately 25% (as of the date of the Fortune article). You be the judge. Did a halt in insider trading activity send a positive message to shareholders, resulting in an increased stock price?
Takeaways
While the Twitter scenario is the first I’ve heard of this type of moratorium, in particular initiated by a party external to the company, it certainly provides food for thought. Social media has given a voice to many – shareholders, customers, media, and others. It’s quite simple to send a message to a company, including its board of directors. And in this case it seems the message was heard. This raises the question – do other companies need to worry about how their 10b5-1 plan trades are perceived by the market? I don’t have a definitive answer on that, but I do have some suggestions.
Consider the potential timing of trades when approving 10b5-1 plans. One thing companies should consider, if they haven’t already, is how the future trades may be perceived by shareholders in the best and worst of trading scenarios. If an insider has multiple stock price targets to trigger sales, for example, and all those targets are hit in a short period of time given a rapid rise in stock price, how will those multiple trades be perceived?
Evaluate how many plans have similar triggers. Companies approach evaluating and approving proposed 10b5-1 plans differently. One thing to assess is just how many insiders have plans or propose plans with similar triggers. If five executives want to sell shares when the stock price reaches $50, this could result in a large volume of shares and transactions hitting the market all at one time. I’m not a 10b5-1 expert, but it seems there has to be a way to monitor existing plan terms and match those up against those proposed by new trading plans. If volume of shares and shareholder/market perception is a potential concern, perhaps the company can establish collective limits (as a matter of policy) as to how many shares can be sold at a given price or under a certain trigger. I may get flack for even suggesting this option, but I’m throwing it out there. Should companies, as a matter of policy, restrict the number of shares that can be sold under a trading plan, or, even a limit on shares sold cumulatively – based on the collection of all existing plans? This would certainly have helped Twitter buffer against the influx of shares into the market earlier this year.
This type of unintended aftermath of 10b5-1 trades feels like new territory. I’d love to hear from anyone who has (as a matter of policy) specific limits to prevent an influx of shares into the market, or who has ideas about best practices to help companies avoid a public call-out like Twitter received. Although they haven’t publicly admitted to any action taken, if we are to listen to the “sources” in this matter, kudos is due to Twitter’s board for handling the situation in a constructive way.
Taxation for Stock Compensation: Beyond the Basics
This unique online course will examine questions and solutions for today’s most pervasive tax compliance challenges, including IRS deposit requirements, reporting on Forms W-2 and 1099-MISC, FICA taxes, acceleration of vesting upon retirement, and more. Don’t wait! You must register by this Friday, May 15, for the early-bird rate!
Quick Survey on Rule 10b5-1 Plans
Wondering how your Rule 10b5-1 plans stack up? Participate in this joint NASPP/Morgan Stanley quick survey to find out. You can complete the survey in less than 15 minutes. Don’t wait–you must complete the survey by this Friday, May 15.
As I write today’s blog, I realize the title may have already created confusion. “A Share is a Share, Until it’s Not a Share?” Huh? No, it’s not an attempt to be cryptic. Let me explain. I’ve recently blogged about some recent (and very public) errors in tracking share limitations within stock plans. Those situations were a good reminder about the need to track and audit the various ways that we limit, distribute, account for, book, and log shares across the various aspects of equity compensation and financial reporting. In fact, I’ve become so passionate about the need to track and reconcile shares that it was the subject of my Administrator’s Corner article (Keeping Track of Plan Limits – Mar-Apr 2015) in the most recent edition of The Advisor newsletter. In thinking through this topic on a more global level, it’s become apparent that tracking shares across equity compensation is not always as simple as it seems, because not all shares are counted or recorded equally across the board. I’m going to dive lightly into the “irreconcilability” of some of these areas in today’s blog.
Get it From the Source
Before we move on, I need to share that next week’s NASPP webcast, Irreconcilable Differences (May 13, 2015 from 4:00pm – 5:30pm ET), is the inspiration for this content. That webcast will examine the counting of shares at a much deeper level than I can do now. A short preview of the webcast is available in the latest episode of our Equity Expert podcast series, in my interview with panelist John Hammond of bendystraw.
How Can a Share Not be a Share?
There are so many areas where shares get recorded in their life cycle. Or not recorded. Keeping track can involve many spreadsheets, reports, third party systems, and manual effort.
One example John covered in the preview podcast was a restricted stock award (RSA) that is issued at grant and recorded on the books of the transfer agent. Although technically issued at grant, the shares underlying the RSA need to be reversed out of the transfer agent’s report that reflects weighted shares outstanding before that figure is used to perform EPS calculations. This takes careful attention and often manual intervention when receiving figures from the company’s transfer agent, prior to delivering those handling financial reporting. John’s advice is that companies reconcile their shares outstanding figures to the transfer agent’s records regularly to get ahead of any share counting differences.
Another area where issuers need to pay careful attention is in managing some of the life cycle “events” and how those events impact share counts. For example, when someone terminates and shares are forfeited, what happens to those shares? What about when a stock option expires? Are they recycled back to the plan? Do they return to treasury shares? What is the path for those shares upon forfeiture or expiration? And, if there is a fungible or flexible share ratio in effect, the stock plan administrator needs to ensure that the ratio is considered in returning shares to the plan (if and when that occurs).
I’ve only been able to bring up a couple of areas where share counting and reconciling matters. If this strikes a chord with you, you’ll want to hear more from the experts in next week’s webcast.
Taxation for Stock Compensation: Beyond the Basics
Last year’s pre-conference program was so well received, we’ve decided to offer it as an online program. This unique online course will examine questions and solutions for today’s most pervasive tax compliance challenges, including IRS deposit requirements, reporting on Forms W-2 and 1099-MISC, FICA taxes, acceleration of vesting upon retirement, and more. Register by May 15 for the early-bird rate!
Quick Survey on Rule 10b5-1 Plans
Wondering how your Rule 10b5-1 plans stack up? Participate in this joint NASPP/Morgan Stanley quick survey to find out. You can complete the survey in less than 15 minutes.
NASPP To Do List
Here’s your NASPP To Do List for the week:
Let’s face it: it’s hard to be a jack-of-all trades in equity compensation. In some ways we need to take on that role, because we have to know at least a little bit about a lot of things. The saying “you don’t know what you don’t know” really applies, and with that comes a quest to continue to learn about the many different areas that fit together to make up the components of administering an equity incentive program. One thing I’ve found incredibly helpful over the years is to have access to industry experts – for all those things I don’t know about a particular topic. On that note, I recently caught up with Elizabeth Dodge of Stock & Option Solutions, an expert in most things related to accounting for equity compensation. Keep reading to find out some of the things she wished more people would ask her!
Ask the Expert
Before I touch on some of the accounting things that companies should be thinking about, I want to remind everyone that one of the most popular type of NASPP webcasts is the Ask the Expert series of webcasts. Essentially, a topic is picked and people can submit questions to the panel of experts in advance of the webcast. The presentation is a compilation of questions and answers. This has always been a popular webcast format for us, and I can see why. It’s a great opportunity for people to get perspective on their real life questions. Our next Ask the Expert webcast will be next week on April 29th. It’s an accounting topic, Ask the Experts: Accounting for Equity Compensation. The deadline has passed to submit questions, but if you have burning accounting questions, it’s possible others may have submitted yours.
Forfeiture Rates and Disclosure Mistakes
In preparation for next week’s webcast, I caught up with Elizabeth to ask her some of my burning questions. You can hear her full interview (it’s short – about 10 minutes long) in the latest episode of our Equity Expert podcast series. All episodes are free to NASPP members and non-members.
I asked Elizabeth about forfeiture rates and whether companies should be using multiple forfeiture rates to haircut their accounting expense. Elizabeth’s bottom line answer was that if companies want to use two forfeiture rates they can do so – one for executives and one for everyone else. But ultimately the forfeiture rate is a game of estimates, and it’s likely not accurate anyway. In her opinion, there’s no need to spend eons of time and energy breaking dissecting things using multiple forfeiture rates (anything more than two rates).
My next question centered on common mistakes she sees companies make in accounting for non-employees. Elizabeth reports that this is an area where she sees lots of mistakes. One reason for this may be technology limitations, as many systems were designed based on older accounting guidance that required accelerated attribution of the accounting for non-employees (pre-FAS 123(R), now ASC 718). Current accounting regulations permit but do not require accelerated attribution of expense. What’s most important now is that companies (in an ideal world) use the same methodology for recognizing expense across the board – for both employee and non-employee grants. So if companies are using straight line expensing for their employee grants, they should use straight line expensing for their non-employee grants. The same applies if the accelerated attribution approach is taken. Some systems may still default to the accelerated attribution method of accounting for non-employees, even if the company is using straight-line accounting for employee and non-employee awards. This is an area of caution in ensuring non-employee grants are accounted for properly.
To hear more of Elizabeth’s tidbits, including common mistakes she sees in ASC 718 disclosures, check out her full podcast interview. And don’t forget to join Elizabeth and her co-panelists in answering many more accounting questions in next week’s Ask the Experts webcast.