During the dot-com boom in the late 1990s and early 2000s, companies were in the habit of using an “evergreen” limit for authorized shares under their Stock Plan. Investors and their advisors (i.e., ISS) hated this, the stock exchanges changed their rules to limit it, and the practice declined. However, there has been a resurgence in using evergreen provisions for IPOs. Proxy advisors and institutional shareholders still hate them, but a company can use the evergreen formula until it first needs to go out to shareholders for re-approval of the Stock Plan (which should be a few years). The NYSE Listed Company Manual § 303A.08 permits companies to use an evergreen formula as long as the Stock Plan has a term of not more than ten years. Any material revision would require shareholder approval.
A recent Radford Consulting article indicates from 2010 to 2014, 70% of the life science and technology IPOs had evergreen provisions adopted while the companies were private in the pre-IPO stage. The median size of the evergreen provision was about 4%. Similarly, Equilar noted that the percentage of companies that had evergreen provisions in 2013 IPOs was 39% compared to 12% of the overall Russell 3000.
Below is a sample from the Stock Plan of a recent IPO:
(b) Automatic Increases. The aggregate number of Shares reserved for Awards under Section 5(a) of the Plan will automatically increase on January 1 of each year, for a period of not more than ten (10) years, commencing on January 1 of the year following the year in which the Effective Date occurs and ending on (and including) January 1, 2025, in an amount equal to five percent (5%) of the total number of shares of Common Stock outstanding on December 31 of the preceding calendar year. Notwithstanding the foregoing, the Board may act prior to January 1 of a given year to provide that there will be no January 1 increase for such year or that the increase for such year will be a lesser number of Shares than provided herein.