Every company wants to know, can we amend our Stock Incentive Plan to allow tax withholding above the minimum required level—up to the maximum statutory rate? The answer is: It depends. (What other answer would you expect from a lawyer?)
Seriously though, for most companies, whether they can amend their Stock Plan immediately will depend on whether or not the amendment can be made without shareholder approval. As readers know, both the NYSE and NASDAQ requirement shareholder approval of a material amendment of a plan that provides for stock awards to directors or executives.
The typical shareholder approved Stock Incentive Plan provides that the company may withhold from shares upon vesting of an award, the minimum number of shares sufficient to satisfy tax withholding requirements (to avoid liability accounting classification under ASC 718). However, under FASB’s ASU 2016-09, companies may withhold shares for taxes up to the maximum individual tax rate in the applicable jurisdiction, without adverse accounting treatment. Therefore, many companies now wish to amend their Stock Plans to eliminate the word “minimum” and allow the withholding of shares up to the maximum statutory rate in the applicable jurisdiction.
“But Mike,” you say, “surely changing just one word in the Stock Plan cannot be material, can it?” Ah, but therein lies the rub. From the perspective of the NYSE and NASDAQ, if the Stock Plan allows the recycling of shares surrendered or withheld to pay tax withholding (that is, puts those shares back in the authorized share pool and allows those shares to be re-used for future awards), then an amendment of that Plan that allows for tax withholding at the maximum rate, instead of the minimum rate, would be material because it will increase the number of shares available for issuance under the Plan!
As I’ve said before, withholding taxes at a rate higher than the minimum may not appeal to many companies who then would have to come up with cash to pay the tax. However, most companies (and many executives) will want to preserve to themselves the flexibility to withhold taxes at a higher rate in some circumstances. Therefore, we are suggesting plan amendments that make a simple language change that gives the company flexibility in tax withholding within the confines of ASC 718’s liability accounting provision.