Since FASB amended accounting rules to give companies the flexibility to withhold taxes from stock plan vesting/exercise at a rate above the minimum, we have blogged several times on the issue of whether companies could or should amend their equity incentive plan to allow for “up to maximum” withholding—and whether such an amendment would require shareholder approval. The views of executive compensation professionals and regulators have evolved, but the NYSE has posted revised equity compensation FAQs on its website. Among the amendments is one to Question C-1, which clarifies that an amendment to allow the maximum tax withholding is not a material amendment. The same is true if forfeited but unissued shares are recycled back into the plan. If restricted shares that have been issued are recycled back into the plan, it is not a material amendment ONLY if those shares are forfeited rather than vesting.
C-1. How do the rules apply to a plan that provides for adding shares back to the pool of available shares in various situations? In some cases, increasing the pool of available shares by adding back shares may be considered a “formula” that implicates the formula plan rules.
A rule to add back shares that have never in fact been issued is not a “formula.” Examples of this include (1) shares that are subject to an option that expires without being exercised, or another award that is forfeited without the shares having been issued, (2) shares that are held back upon exercise of an option to cover the exercise price, and (3) shares that are held back to satisfy income tax obligations. By extension, an amendment to a plan to provide for the withholding of shares based on an award recipient’s maximum tax obligation rather than the statutory minimum tax rate is not a material revision if the withheld shares are never issued, even if the withheld shares are added back to the plan.
On the other hand, a rule to add back shares that have actually been issued generally is considered a formula. For example, adding back shares that a grantee already owns that are tendered to pay the exercise price of an option or satisfy a tax obligation is a “formula,” as is adding back shares that are repurchased by the company using the cash paid upon exercise of options. The only exception to this rule, is that the adding back of shares of restricted stock that are forfeited rather than vesting is not a formula, even though technically the restricted stock is issued upon grant. However, consistent with the preceding paragraph, a rule to add back shares that are withheld from restricted stock upon vesting to cover taxes is a formula unless the forfeited shares are immediately cancelled upon vesting. If a plan has a fixed number of shares available, but for one or more formula addback rules, the latter may be treated as separate from the fixed share pool for purposes of our rules. Thus, if a “formula” rule is included in a plan, the term during which the formula may be operative must be limited to 10 years from the last shareholder approval of the plan, but that term need not be applied to the fixed share pool itself. Similarly, if such a plan was in effect as of the effective date of our rules but had not been approved by shareholders, the company may continue to use the fixed share pool after expiration of the limited transition period without seeking shareholder approval, even though it will not be able to continue to use the formula addback rules without shareholder approval.