As we have previously discussed, this year’s amendment of the accounting standards for stock based compensation—ASU 2016-09—allows for equity plans to withhold a participant’s shares of taxes related it his or her award up to the maximum individual tax rate in the applicable jurisdiction, rather than the just the minimum statutory withholding amount, without triggering liability accounting treatment. However, as we also have previously discussed, there should be some concern whether such an amendment to an equity plan would require shareholder approval.
In August, the NYSE issued favorable guidance that some amendments to plans of this nature would not be considered material amendments. Today, Nasdaq updated its FAQs, which now indicate that an amendment to increase the ability for a plan to go from withholding at a minimum tax rate to a maximum tax rate would not be considered a material amendment.
FAQ—Is an amendment to an equity compensation plan to increase the withholding rate to satisfy tax obligations, such as from the minimum tax rate to the maximum tax rate, considered a material amendment?
Generally, an amendment to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to an equity compensation plan. Allowing the holder of an award to surrender unissued shares to pay tax withholdings is similar to settling the award in cash at market price, and neither creates a material increase in benefits to participants nor increases the number of shares to be issued under the plan. This type of change also is not an expansion in the types of awards provided under the plan. This analysis is the same regardless of whether the plan allows the shares surrendered for tax withholdings to be added back to the pool of shares available for issuance as future awards. Accordingly, an amendment to an equity compensation plan to increase the withholding rate to satisfy tax obligations would not be considered a material amendment to the plan.