Seeking shareholder approval of an equity compensation plan has become a multi-step, often complex process. Gone are the days when management simply would discuss a share increase with the board of directors, and the company would include a brief discussion of the proposal in the proxy.
Companies that are planning to submit an equity plan for shareholder approval should start the process early and consider a wide range of issues, from shareholder perspectives to future needs for equity grants to evolving case law. In this two-part blog series, we outline steps to be considered when submitting an equity plan for shareholder approval.
- Review your shareholder base to determine whether the shareholders follow Institutional Shareholder Services Inc. (ISS) or Glass Lewis recommendations.
- If your shareholders follow ISS recommendations, consider subscribing to ISS’s proxy review services.
- Review any internal guidelines published by your shareholders for approval of equity plans.
- Whether you subscribe to ISS’s services, sign up for the ISS Equity Plan Data Verification portal (no charge) to get data verification login access. Through this portal, ISS will send a confirmation of the data on which their recommendation will be based. Upon receipt of the ISS data confirmation, you will have two business days to verify the data or request modifications if the data is incorrect.
- When considering share authorization, review share overhang (outstanding equity grants as compared to outstanding shares), burn rate (share usage) over the past several years (usually three years), the company’s projected need for shares over the next several years (usually three to four years), and, if applicable, ISS's assessment of the allowable share authorization.
- ISS's current methodology for reviewing equity plans, the Equity Plan Scorecard, gives "points" based on three pillars: plan cost (share authorization), plan features, and grant practices (including burn rate). For more detail, see the US Equity Compensation Plans Frequently Asked Questions.
- ISS reviews share authorization in two ways: (1) taking into consideration outstanding equity grants and (2) without including outstanding equity grants. This approach is helpful for companies with a large number of outstanding equity grants, such as unexercised stock options, that create a high overhang percentage.
- Under the Equity Plan Scorecard, ISS's “points” for plan features take into account, among other factors, whether the plan has:
- Double trigger vesting
- A minimum one-year vesting requirement
- Prohibition against paying dividends prior to vesting of the ward
- Prohibition against discretionary vesting (except upon death, disability, or change in control)
- Prohibition against liberal share counting (e.g., adding back to the plan reserve shares that are withheld for taxes or for the exercise price of options)
- Specific disclosure of change in control vesting treatment (with no discretion)
The ISS analysis also takes the following into account:
- The company’s three-year average burn rate
- The estimated plan duration
- The vesting terms of CEO grants
- The proportion of performance-based awards granted to the CEO
- Whether the company has a clawback policy
- Whether a post-vest holding period is imposed.
In determining whether to include ISS’s favored plan terms, companies should balance the desire to maximize the share authorization against the importance to the company of retaining flexibility, especially with respect to vesting.