Publicly traded companies generally file registration statements on Form S-8 to register the offering of the company’s stock pursuant to the company’s equity incentive plans under the Securities Act of 1933, as amended (Securities Act). This same filing requirement applies under certain circumstances to a company’s nonqualified deferred compensation plans.
Plan Interests as Securities
Longstanding guidance from the Securities and Exchange Commission (SEC Release No. 33-6188, 45 Fed. Reg. 8960, Feb. 11, 1980) addresses when the interests of participants in an employee benefit plan constitute “securities” under the Securities Act, the offer or sale of which is subject to the registration requirements of the Securities Act. In such cases, these “plan interests” constitute a separate offering, analogous to debt securities.
In the words of Release No. 33-6188, “such interests are investment contracts because the plans are in essence investment vehicles designed to produce profits in the form of retirement or other benefits for the employees through the efforts of plan managers.”
However, not all plan interest are securities. Under SEC guidance, the determining factors are whether a plan is “voluntary” and “contributory,” and only interests in a plan that is both voluntary and contributory are securities.
- Voluntary plans are plans in which the employees have a choice as to whether to participate, as such choice constitutes an investment decision to participate in the plan. By contrast, if participation in a plan is mandatory, no choice (and thus no investment decision) is made.
- Contributory plans are plans in which employees decide to contribute a portion of their earnings or savings to a plan. If a plan consists only of contributions made by the employer without the participants giving up anything to which they would otherwise be entitled, the plan is noncontributory.
Note that one factor that does not change the analysis is whether the plan is a defined benefit plan or defined contribution plan, as both can be contributory.
Application to Deferred Compensation Plans
A typical “top hat” nonqualified deferred compensation plan, in which participants can elect to defer a portion of their salary and/or incentive compensation to a later date or event, meets both the “voluntary” and “contributory” requirements of this analysis, and therefore the plan would generally be considered an offering of securities (the plan interests) subject to the registration requirements of the Securities Act. On the other hand, for example, interests in a deferred compensation plan to which only the employer contributes, even if the participants then direct the investment of their accounts, would not be securities under this analysis.
(The discussion above applies to non-qualified deferred compensation plans; there are different issues applicable to tax-qualified retirement plans, such as 401(k) plans. Interests in such plans are generally exempt from registration under the Securities Act unless the plan is a voluntary contributory plan that invests in the securities of the employer company in an amount greater than that paid into the plan by the employer.)
Form S-8 Registration
Where plan interests are deemed to be securities, and thus registration under the Securities Act is required absent an applicable exemption (as discussed below), companies register on Form S-8 interests in the plan, rather than a fixed number of shares as a company would do for an equity incentive plan. The Form S-8 will register a dollar amount of plan interests as unsecured debt obligations of the company. The general requirement of Form S-8 is to provide a description of the securities offered; however, this does not apply to plan interests in a deferred compensation plan.
As with an equity incentive plan, registration on Form S-8 also requires the distribution (but not the filing with the SEC) of a prospectus to participants that includes material information about the plan, including its eligibility and contribution rules, investment terms, and tax effects.
Alternatives
Companies may also consider whether an exemption from Securities Act registration is available, including whether participation solely by a limited group of insiders (e.g., directors and executive officers) renders the offering of securities under the plan an offering solely to accredited investors, and thus eligible for a private placement exempt from registration under the Securities Act. It should be noted, however, that such analysis will be highly fact-specific and the exemption could be lost if the eligible group changes over time.
For concerns about the application of these securities registration requirements to deferred compensation or other employee benefit plans, please feel free to contact the authors or your Morgan Lewis contacts.