In late March, ISS issued an updated Equity Compensation Plans FAQ. This development was largely eclipsed by the FASB’s issuance of ASU 2016-09, so I haven’t had a chance to get around to it until now. Here is a quick summary of the most significant updates:
Plan Amendments
FAQ 2 has been updated and a new FAQ 28 has been added to clarify that plan amendments may be evaluated under the Equity Plan Scorecard (EPSC), if the amendment could increase the potential cost of the plan. (By “cost,” ISS means dilution or shareholder value transfer; ISS is less concerned with the actual P&L expense.)
In other cases, i.e., amendments that don’t increase cost to shareholders, ISS evaluates the amendment based on whether it is favorable to shareholder interests, but without going through the whole EPSC.
Plans submitted for shareholder approval solely for Section 162(m) purposes fall into a separate category and ISS hasn’t changed or clarified anything with respect to these proposals.
Share Withholding
ISS suggests requesting new shares or extending the term of a plan as examples of the types of amendments that would trigger a new EPSC evaluation, but my guess is that this would also include amendments to allow share withholding for taxes up to the maximum tax rate when the shares withheld will be returned to the plan (my blog from last week explains why these amendments are necessary).
It’s possible that the timing of the release of these updated FAQs is not coincidental. It’s also possible I’m paranoid; hard to say. But then again, just because I’m paranoid, doesn’t mean ISS won’t apply the EPSC to your share withholding amendment. This issue is definitely a hot button for ISS. If your plan allows shares withheld for taxes to be returned to your plan, it’s a good idea to discuss this with whoever advises you on ISS concerns before you amend your plan.
Performance Awards
Previously, the FAQ provided that ISS would consider performance awards as being subject to accelerated vesting upon a CIC, unless the amount paid was tied to the performance achieved as of the CIC and was pro rated based on the amount of the performance period that was completed.
The new FAQ states that:
If a plan would permit accelerated vesting of performance awards upon a change in control (either automatically, at the board’s discretion, or only if they are not assumed), ISS will consider whether the amount of the performance award that would be payable/vested is (a) at target level, (b) above target level, (c) based on actual performance as of the CIC date and/or pro rated based on the time elapsed in the performance period as of the CIC date, or (d) based on board discretion.
I’m not sure this changes much, but it does seem to be a more nuanced position.
I’m on the east coast, and we’ve had a long and brutal winter this year (at least by this California girl’s standards). So you may be able to imagine that I (along with millions of others oppressed by the frigid weather) breathed a huge sigh (not to be confused with a sigh of relief) when the famous groundhog, Punxsutawney Phil, saw his shadow on this year’s Groundhog Day (February 2nd). The folklore says that when the groundhog sees his shadow, winter will continue at least another 6 weeks – not welcome news for those of us who have been freezing for way too long.
What does Groundhog Day have to do with stock plans? What I wanted to suggest is that if there were a groundhog used to forecast stock plan activity (perhaps a cousin of the weather predicting one in Pennsylvania), I would bet that this year he’d be seeing his M&A shadow, suggesting a blockbuster year is ahead for M&A activity. The buzz is virtually everywhere from the Wall Street Journal to firms like Morgan Stanley and issuer companies themselves (to name only a few – there are many others) predicting a very robust M&A market this year.
Why We Care About M&A
Stock plan professionals know that a merger or acquisition often involves stock plans. Grants from an acquired company may be assumed or cancelled. New grants may be issued to incoming or existing employees as a result of the transaction. Not only is there likely to be stock plan activity, but it is possible we could be seeing record volumes and values of grants. Last week’s acquisition of WhatsApp by Facebook included $3 billion in restricted stock unit shares alone.
Why You Should Care About M&A
It’s important that stock plan administrators get a seat at the table in M&A task force meetings or discussions. Historically, it was not uncommon for the stock plan group to be among the last to know about the latest M&A activity, sometimes after the terms of the deal had been finalized. If stock plan shares are going to be a component of the transaction in any form, the stock plan group needs to be involved.The last thing you want is to find out that a deal is done, and the terms are just too challenging to administer. Or, they can be handled, but only with great effort and time consuming labor involved.
Brush Up On Your M&A Needs and Wants
Here are a few suggestions to get your brain working on the M&A front:
Put your feelers out. M&A may or may not be a present internal topic of discussion, but you can start the discussion. Let key decision makers know that you want to be involved from the get-go should the M&A bug take hold in your company. It’s not too soon to have a conversation – even if you’re not aware of any imminent activity.
Brush up on what you’d actually need if an M&A transaction landed on your doorstep. Sure, you may not be able to predict everything you’d need right now, but you can remind yourself of the key things that you’d likely want to know if someone was standing at your door informing you that your company just acquired that XYZ company down the block. It’s not uncommon for there to be little or no advance warning for a merger or acquisition. In thinking through the types of things you’d need to know, you’ll be much better prepared if and when that day comes.
With the most promising M&A season in years upon us, now is a great time to revisit the NASPP’s M&A portal. There are articles to remind you of what you need to know if you find yourself handling M&A activity. There is also a sample M&A Conversion Checklist and other tools to ease you through the process.
Only time will tell if our fictional stock plan groundhog would have been right. Given the accuracy of the groundhogs so far this year, perhaps it’s time to get ahead of the game on this one.
Last Tuesday, January 25, the SEC issued final regulations on Say-on-Pay votes. For the most part, the SEC adopted the proposed regulations, with only a few minor adjustments.
As expected the regulations require three non-binding votes:
Say-on-Pay: Shareholders must be permitted to vote on executive compensation every one, two, or three years. The first vote must be held at the company’s first annual meeting on or after January 21, 2011. Shareholders will be voting on the compensation paid to executives as disclosed in the proxy statement.
Say-on-Pay-Frequency: Shareholders must also be permitted to vote on how frequently the company holds a Say-on-Pay vote. This vote must occur at least every six years, with the first vote occurring at the company’s first annual meeting on or after January 21, 2011.
Say-on-Parachutes: Shareholders must be permitted to vote on golden parachute arrangements. If these arrangements have not previously been voted on, this vote must be included in the proxy statement relating to the merger (or similar transaction) for which the compensation will be paid. This requirement applies to filings on or after April 25, 2011.
McGuireWoods provides a good summary of the final regulations; we’ll be posting an alert with links to additional memos as we receive them.
Other Dodd-Frank Rulemaking Delayed As Broc Romanek mentioned in his blog (“Four of Corp Fin’s Dodd-Frank Rulemakings Delayed,” January 27, 2011), the SEC has pushed back its estimate of when proposed rules will be issued for the following projects:
Pay-for-performance disclosure (how compensation is related to financial performance)
Pay ratios (ratio of CEO pay to median employee pay)
Clawback policies (clawback of officers’ compensation upon financial restatement)
Hedging policies (whether the company has a policy regarding the ability of directors and employees to hedge)
Based on the SEC’s revised timeline for implementing the Dodd-Frank Act–the proposed rules now aren’t expected until August, at the earliest, and possibly as late as December–Broc speculates that rules for these projects may not be finalized in time for the 2012 proxy season.
A More Social NASPP The NASPP has boarded the social networking train: you can now follow us on Twitter or like us on Facebook. We’ll be posting announcements whenever we post new content on Naspp.com–it’s a great way to keep up with all the content we have on the website.
NASPP Members Eligible for Discount on CEP Exam If you’ve been thinking about enrolling for the Certified Equity Professional exam, now is the time to do it. Because the NASPP serves on the CEP Institute Advisory Board, we are able to offer NASPP members a $200 discount on the June 4, 2011 exam.*
The CEP program is the certification standard for the equity compensation industry, comprised of a three-level, self-study program in the technical regulatory issues affecting equity compensation.
Visit the CEPI website for more information on the program. To take advantage of the NASPP member discount, contact the CEPI at (408) 554-2187. Don’t wait; registration closes on April 22.
* The Fine Print: Eligible registrations include new Level 1, Level 2 or Level 3 registrations for individuals who are involved in administering or managing their own company’s equity programs. Deferrals and re-tests are not eligible for a discount. Individuals already registered are not eligible for a retroactive discount. Candidates from service providers do not qualify. Questions regarding eligibility can be directed to the CEPI at (408) 554-2187.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
If you are in the San Diego area, attend the San Diego NASPP chapter meeting on Wednesday, Feb 2. Robyn Shutak, the NASPP’s Education Director will there; be sure to say hello!
These were the words uttered recently by a stock plan manager in reference to managing a “small and simple” merger project internally with no additional resources.
Relatively few stock plan managers found themselves in this situation last year. We saw a dramatic decrease in M&A activity in 2009, which is no surprise given the condition of our economy. However, the second half of the year did bring with it increased M&A activity, and news sources are all abuzz with anticipation for 2010.
Even though a merger or acquisition may be exciting for shareholders and a great way for a company to grow, it can be a serious undertaking for a stock plan manager. If an acquisition or merger is potentially in your future, start brainstorming now on what that project management will look like for you and your team.
The Left Hook
What’s the big deal, you ask? Just give me the employee and grant data along with the terms of the transaction, and I’ll throw it in Excel, work my magic and have the imports ready to process. (I mean, you should see how smooth my annual grant procedures are!) Well, if there’s one thing you can guarantee about a merger or acquisition, it’s that some part of the process of gathering and crunching your data will not go as planned. It could be something as clear cut as a spreadsheet with mismatched data (say names matched with the wrong SSNs) sent to you by the other company or a real doozy like finding out that the grants in an international location were actually all out of compliance with regulations in that country.
So, expect the unexpected when projecting the amount of time you’ll need to process the transaction and leverage your friends and peers who’ve gone through a merger or acquisition themselves. In fact, ask around at the next NASPP chapter meeting you attend and find out who’s had experience with M&A (even if you’ve done a few yourself) and ask them for just one issue they encountered in their transaction that they weren’t expecting. You can tuck those thoughts away in your “just in case” file and pull them out if your company brings you a merger or acquisition this year. If you’re looking for a more comprehensive approach to being prepared, enroll in our online education program, “Tackling Equity Compensation Issues Related to Mergers and Acquisitions,” and get a heavy dose of the due diligence considerations that you’ll want to know to put together a smooth transaction.
The Decision Dilemma
If you will be assuming any portion of the outstanding stock grants, then there are a lot of issues to consider. Converting grant data means really identifying the administrative, tax, and financial accounting consequences your decisions and finding the best balance for your company. For example, will you be converting just shares outstanding or including historical data as well? It may make sense to convert both outstanding and historical grant data because you will be acquiring ISO grants and dealing with shares purchased from an ESPP. Having the historical data makes tracking disqualifying dispositions easier. However, the “new” historical data will impact reports you run for periods prior to the transaction and you will need to accommodate the additional shares that will appear to be granted from your plan. For many issues, you will find that there all your choices have a downside. Decide what works best for your company by bringing other departments (like payroll and finance) in on the conversation and testing your strategies out in a mirror database before going live.
Think Outside the Box
So, that brings me back to the idea of how to manage your resources on a merger or acquisition. If you have a large stock plan management team and are dealing with a relatively small acquisition, you might be able to allocate enough resources to complete the transaction internally. However, if you are a one-person team or one that is already pushing the envelope on time commitment, you should give outsourcing a serious look.
Of course, you want to make the most of your consulting dollar! That means getting multiple quotes and asking the right questions. Ideally, if you’re getting help on your merger or acquisition, the individual or firm you bring in on the project will have experience with a similar transaction. However, no two transactions are the same. You know your company’s history, administrative priorities, and database best. It’s possible that you are the best person for the job or that your company is just not comfortable with handing over any part of the transaction to an outside resource. If that’s the case, you can still get help for your project. Think outside the box and bring someone in to help with your standard administrative responsibilities and free yourself up to focus on the merger or acquisition.