Tips for Seeking Shareholder Approval of Equity Benefit Plans

Most public companies regularly submit equity benefit plans to their shareholders for approval. As a general rule, both NYSE and Nasdaq require that every new benefit plan, and any material amendment to an existing plan, be approved by the shareholders if it offers equity to the company’s officers, directors, employees or consultants (subject to certain exceptions for retirement plans, plans acquired via acquisitions and “inducement awards” to newly hired employees). In addition, IRS Code Section 162(m) generally requires that an equity plan be approved by shareholders not less than once every five years in order to avoid that section’s limit on deductibility of executive compensation.

The SEC’s say-on-pay rules and the heightened scrutiny by institutional investors of executive compensation now make shareholder approval more of an adventure than it used to be. Therefore, if your company is considering whether to, or is required by rule to, request shareholder approval of an equity plan this proxy season, here are some tips for navigating that process:

Plan ahead. It is surprising how often the decision to seek shareholder approval of a plan or a plan amendment is made at the eleventh hour of the proxy preparation process. Give yourself plenty of time to analyze the issues, map out and implement a strategy, and prepare and vet the necessary disclosures. If you haven’t already, it is not too soon to begin that process.

Pay attention, but don’t over-react, to proxy advisor standards. The fact is that, though they continue to be important players in this arena, ISS and Glass Lewis now have noticeably less influence on the vote of institutional investors (particularly the large institutions, which tend to conduct their own independent analyses). Most institutional shareholders understand the limitations of the proxy advisors’ check-the-box methodology and are open to hearing the company’s side of the story. It is also true that the vast majority of submitted plans receive shareholder approval. Therefore, feel free to adopt reasoned and defensible plan provisions that best match your company’s needs, rather than adhering rigidly to a proxy advisor’s checklist.

Understand your institutional shareholders’ positions on equity plans. To what extent do they rely on proxy advisors to determine how to vote? Do they instead (or also) employ their own methodology? What are their hot buttons?

Consider, in light of the foregoing analysis, whether to engage with key institutional shareholders with regard to your plan. Does the proposed plan deviate significantly from proxy advisor standards or the standards of your investors? Are there nuances to be talked through? When was the last time you met with them by telephone or in person? Do they welcome (or expect) advance notice of a plan submission?

Use your proxy statement disclosures to “sell” the reasons for the new plan or plan amendment. Just as with the rest of your proxy statement, use bullets, charts, graphs, colors and other creative techniques to get your point across quickly and clearly. Institutional shareholders don’t have a lot of time to figure out what you are doing and why. Make it simple for them.

Be very careful when drafting those disclosures. It is easy to rely too heavily on the disclosures from the last time you sought shareholder approval. Chances are that the terms of the plan, tax laws, plan administration or governance procedures have changed since then. Also, the disclosures can be detailed and complex. Don’t create needless problems by providing disclosure that does not perfectly match the actual terms of the plan or how it operates. Plaintiffs’ attorneys are watching.

Confirm that your disclosures:

  • Thoroughly describe all material features of the plan or amendment (Schedule 14A, Item 10);
  • Provide current, accurate and thorough discussion of tax consequences (Schedule 14A, Item 10);
  • Include a New Plan Benefits Table, which specifies any pre-approval commitments that have already been made under the new plan or amended plan (Schedule 14A, Item 10);
  • Include an Equity Compensation Plan Table (Regulation S-K, Item 201(d)); and
  • Comply with the specific disclosure requirements of Code Section 162(m).

Be sure that the “selling” and other optional information included in your disclosures comply with the company’s normal standards for SEC disclosure. Despite the importance of selling your position, do not obscure or distort the required disclosures or otherwise paint an inaccurate picture.

Use plain English. Benefit plans, and the related ERISA and tax code provisions, are famously complex. Adhere to the SEC’s mandate that disclosures be delivered in plain English. Resist the urge to fall back on boilerplate language, get wrapped up in esoterica or use too many Code references and obscure terminology.

All the best,

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