The last couple of weeks have been fun but it’s time to get back to serious stuff. Last week, my Google alert for stock options exploded with articles on Barnes & Noble’s snafu relating to an option granted to their CEO. One day’s alert had three articles on this topic, with more articles in subsequent alerts. For today’s blog entry, I offer my take on the blunder.
Oops–Can We Have That Grant Back?
Back in early December 2011, Barnes & Noble’s compensation committee decided to grant the CEO an option to purchase 1,000,000 shares. Unfortunately, no one noticed that a grant of this size exceeded the plan’s limitation on the number of shares that can be granted to an individual. The error wasn’t discovered until somewhere around six months later (the amended Form 4 correcting the original report of the grant was filed on June 28, so I’d guess they discovered the error towards the end of June).
Barnes & Noble really had no choice but to rescind the portion of the grant that exceeded the limitation (500,000 shares), as if it had never been granted. The grant wasn’t valid under the terms of the plan and, as an NYSE-traded company, Barnes & Noble can’t make grants outside of its shareholder approved plans (unless the grants themselves are approved by shareholders). They are now asking shareholders to approve an amendment to the plan that will increase the individual limit; if passed, another option to purchase 500,000 shares will be granted to the CEO at the then-current FMV.
What the Heck?
This individual limit is required for options granted under the plan to be considered performance-based compensation under Section 162(m). If your company is public, you probably have a limit like this stated in your plan. If you don’t know what it is, now would be a good time to dig out your plan and look it up. 10 pts to anyone who already knows what the limit in their plan is without peeking. You might also want to verify whether the limit is adjusted for stock splits.
Last year, the IRS issued proposed regs to clarify that just stating a maximum number of shares available for grant under the plan isn’t sufficient to satisfy this requirement (even though this does effectively limit how many shares can be granted to an individual). The plan must have a separately stated individual limit (see the NASPP alert, “Proposed Regulations Under Section 162(m),” July 2011).
Shouldn’t Someone Have Noticed?
It seems like this error should have been caught sooner. Ideally, stock plan administration would be informed of any grant recommendations to be submitted to the compensation committee for approval in advance, so that they can review the grants to for problems like this (and also so they can get a head start on the Form 4 filing, if they are responsible for it).
I understand that this doesn’t always happen–sometimes stock plan administration is the last to know about new grants to executives. But they should be informed of the grants shortly after approval, so that the grants can be entered into the administrative system and properly accounted for. Part of this process should include reviewing all grants to ensure that the plan limit isn’t exceeded. Remember that this isn’t an individual grant limit; it’s a limit on the cumulative number of shares that can be granted to an individual over a period of time. Even a relatively modest grant could be the fabled straw that breaks the camel’s back, if an individual has previously received an excessive number of grants or excessively large grants. Having an appropriate control procedure in place here can allow stock plan administration to raise the red flag before the grants are publicly reported and a media circus ensues.
Don’t Do That
Diligent readers of my blog already know my opinion of mega grants like this (see “And Another Thing,” May 5, 2009). Running afoul of the individual grant limit in your plan is just one other reason to avoid them.
More Section 162(m) Traps for the Unwary
For more Section 162(m) gotchas, don’t miss the session “Section 162(m): Keeping Your Executive Compensation Deductions Safe from the Tax Man,” at the 20th Annual NASPP Conference.
Tags: Barnes & Noble, plan document, Section 162(m)
A significant portion of stock plan administration involves employee communications. Communications break out into four basic categories: standard education materials, plan documents and agreements, individual statements and alerts, and correspondence. It is important to not only document delivery of (or access to) many communications, but also archive them so that they are accessible in the future. Plan documents and grant agreements receive the most scrutiny when it comes to documentation and archival procedures. It’s more difficult to know which of the other communications may either be the focus of a misunderstanding or the resolution to it.
Standard Education Materials
This is what your plan participants look to for answers regarding their own equity compensation. As you update educational materials, be sure to document the dates and locations that older versions were available. This is true for both printed and electronic materials. For printed versions, ensure that outdated versions are no longer available at any location within your company. It’s a good idea to date each printed version of your educational materials, with a note that the current version supersedes any previously distributed version(s). If your materials are posted on the intranet or otherwise available online to plan participants, be sure that there no outdated materials or links remain accessible after they have become obsolete. In addition, alert participants to updated materials so that they are aware of changes being made.
Individual Statements and Alerts
In the case of individual statements and alerts, aside from confirming the accuracy of all information delivered, possibly the most important factor is being able to prove delivery. Your broker may be able to assist with this for statements delivered via the individual brokerage account. Confirm what technology is available and for how long.
If you send alerts or statements to employees internally, consider how you will document delivery. See if you can use a return receipt, or if it’s possible to deliver via the intranet and archive access records. In addition, it’s best if you can archive the actual statements and alerts rather than relying on your stock plan administration database to reproduce it at a later date.
Correspondence
Of these four, correspondence generally receives the least amount of scrutiny and is least likely to be archived. It’s not feasible to have your legal team approve each and every response that you provide to participant inquiries, and so the risks of communicating information that is inadvertently incorrect, misleading, or could be taken as tax or investment advice. Additionally, it’s likely that some correspondence takes place outside the stock plan management team.
Ideally, your company would have a common repository for interaction records with employees that could be easily referenced by employee, date, or subject. Since I don’t actually know of one single company that has a system like this in place, I’ll scrap the ideal for now. If all you have is Outlook, then devise a strategy for archiving sent e-mails, including which types of correspondence qualifies as important enough to archive. It could be by location, topic, or whatever makes the most sense for you and your team. Don’t forget to document your strategy for future reference!
Why Bother?
This all might sound like a lot of work, but there are two very good reasons to have a robust communications archiving practice. First, it may be necessary to recover communications in the event of a legal or compliance issue. Second, it can serve as a way to calm an agitated employee who feels that the stock plan management team failed to provide enough information. This is particularly true for alerts–if you can tactfully show an employee that they actually did receive a “missing” alert, she or he will be less likely to focus anger and frustration at the stock plan management team. Also, that employee will be way more likely to pay attention to communications from the stock plan management team in the future!
A Cautionary Note
The flip side of diligence in archiving communications is that they can be made available in the event your company is involved in a lawsuit. Depending on the issue and how closely it relates to equity compensation, it could obligate the stock plan administration team to a significant amount of time dedicated to retrieving archived communications.
-Rachel
Tags: alert, archive, email, grant agreement, plan document