Determining the “date of grant” of an equity award is important if the issuer desires accurate accounting charges and compliance with applicable tax laws. Though such determination is typically straight forward, there are three common situations where identifying the date of grant could become more complex. Addressing these three factual scenarios is this “Tip of the Week.”

Background

  • Absent a valid delegation of authority, only the Board of Directors has the authority to grant equity awards. Most often the Board of Directors will delegate this authority to the Compensation Committee pursuant to the Compensation Committee Charter, and such Charter may in turn allow for a further downward delegation to a sub-committee (e.g., to an inside director or a non-director officer).
  • The date of grant is the date that the Board of Directors or the Compensation Committee (whichever has authority) “approves” a grant containing “definitive terms” (i.e., definitive terms being the identity of the recipient, the number of shares subject to the award, the vesting schedule, and the exercise price (if applicable)).

Three Scenarios

  • Compensation Committee Only Makes Recommendations. Some Compensation Committee Charters provide that the Compensation Committee only has the authority to make equity award recommendations to the Board of Directors, for the latter to approve the equity grants. Though this represents a minority practice, it is still common enough and missed from time to time (i.e., missing this issue means the action by the Compensation Committee did not effectuate the grant, and no grant will have occurred until the Board of Directors acts at some later date). For this reason, a review of the issuer’s Compensation Committee Charter is warranted.
  • Unanimous Written Consent Resolutions. It is common to have unanimous written consent resolutions effectuate a grant of equity, especially when the Board of Directors or the Compensation Committee previously discussed the grant at a prior meeting. As a matter of state law, unanimous written consent resolutions must be signed by the individuals (i.e., the Board of Directors or the Compensation Committee members, as applicable). Thus, the issue to keep in mind is that even when such resolutions contain a date of grant that is prior to all of the signatories signing the resolutions, such hard-wired date will not be the date of grant; instead, the date of grant will be the date the last signatory signed the resolutions.
  • All Definitive Terms Not Known Until Later. In situations where all of the definitive terms are not known at the time the Board of Directors or the Compensation Committee takes action, the date of grant will be such future date when all of the definitive terms become known. For example, if the minutes of the Compensation Committee “hereby” effectuate a grant of stock options with a strike price equal to the closing date value one week from today, then the date of grant is not the date the Committee acted, rather, the date of grant will be one week from today when the closing value becomes known.