Last week, I stated that my next three posts would be on recurring proxy statement disclosure issues (last week was on the need to review Item 405 disclosures). Today, we will talk about reporting performance-based awards on Form 4. 

We all know that grants of stock awards must be reported on a Form 4 within two business days of the grant. However, grants of performance-based stock awards are reportable as derivative securities only if the performance condition relates solely to the stock price. In most cases, performance awards are based at least in part on other factors, such as an increase in net earnings, earnings per share, or other financial measures. In such cases, the performance shares are not deemed to have been acquired by the grantee until the performance criteria have been satisfied, i.e., the vesting date. Thus, a performance share award that vests upon the stock price hitting, for example, $25 per share, would be reportable on a Form 4 within 2 days of grant, while a performance share award that vests, for example, based on EPS would not be reportable until the award vests (and the stock is delivered). 

An award that vests or becomes exercisable only if the corporation achieves a specified level of Total Shareholder Return ("TSR," defined as stock price appreciation plus dividends) can be tricky. Awards based on Relative TSR would not be considered to be tied solely to the price of the corporation’s stock. Additionally, if dividends may be a significant component of the corporation’s total shareholder return, the performance condition would not relate solely to the stock price. 

For awards that vest based on performance but remain subject to an additional service period (e.g., one year) before shares are delivered, the corporation would report the acquisition of performance units in Table II upon the measurement date and then report the acquisition of actual shares on Table I when the units convert to shares, e.g., one year later. When a performance share unit award becomes a fixed number of units at measurement that tracks the stock price, it would then meet the definition of a “derivative security.” 

As with all matters related to Section 16 and Form 4s, for more detail, see Romeo & Dye’s Section