A blog from Hunton Andrews Kurth’s Tony Eppert is a good one to keep on hand for whenever you’re making equity grants. Here are some of the reminders he lists:
– Verify the Equity Plan’s Share Reserve Not Exceeded. With respect to the upcoming grants, the Company will need to verify that the equity plan’s share reserve will not be exceeded. This has two parts. First, to the extent the equity plan has liberal share counting, the Company will need to track equity grants (which are a subtraction from the share reserve) AND track forfeitures of equity awards (which are an addition to the share reserve). Second, the Company should determine whether a sufficient number of shares would exist if the outstanding performance awards were settled at their maximum levels (i.e., some companies only track share counting of performance-based awards at their target levels).
– If Applicable, Verify Compliance with any Prior Delegations of Authority. Absent a valid delegation of authority, only the Board of Directors has the authority to grant equity. Typically, the Board delegates such authority to the Compensation Committee pursuant to the Compensation Committee Charter. And sometimes the Compensation Committee provides for a further downward delegation to a sub-committee or to the CEO in order for the latter to act quickly in new hire situations (as opposed to waiting until the next regularly scheduled Compensation Committee meeting). Also, verify the grant complies with the parameters of the delegation (e.g., using pre-approved award agreements, complying with share cap restraints).
– Service Provider Must Be a “Natural Person.”Under Form S-8 rules, the recipient of an equity award must be a natural person. As a result, equity awards cannot be made to entities and also be covered under the Form S-8 (though there are rules that would allow in individual of the intended entity to receive the equity award in name only and on behalf of the entity).
-Liz Dunshee, CompensationStandards.com June 30, 2020