As we approach the end of 2015, it’s a good time for companies to review their equity compensation plans to see if any action items will be required for 2016. The following two items are particularly important:
- Equity Compensation Plan—Term: All equity compensation plans, and some employee stock purchase plans, contain a term for which grants may be made under the plan. Once the term for the plan has expired, no future grants may be made under such plan, both for tax reasons and securities law reasons.
As a result, each year, it is important to see whether the term of a corporation’s plan is set to expire in the coming year. This is particularly relevant for plans that have existed for a number of years without any shareholder action, as well as for plans for which shareholder action has occurred, but there has been no extension of the plan’s original term.
- Equity Compensation Plan—Authorized Shares: All equity compensation plans and employee stock purchase plans authorize a specified number of shares that can be granted under the plan. There are also usually per-person limits on the number of shares that each participant can be granted each year.
Every year, it’s important to review the shares remaining available for issuance for future grants to ensure that there are a sufficient number of shares available for grant to cover the expected grants for the coming year. It is also important to review the per-person limit under the plan to ensure that grants are not made in any year that exceed the applicable limits. If there are not enough shares authorized for issuance under the plan and/or grants may be made that exceed the relevant limits in the plan, the plan will need to be amended and shareholder approval will be required.
Failure to comply with the limits under the plan and/or make grants when there are not enough shares authorized for issuance (as well as issuing grants after a plan’s term has expired) raises a number of potential issues, including, securities, tax, and potential litigation claims.