A shareholder derivative action has avoided dismissal because the underlying complaint reasonably claimed that the challenged stock option grants were not protected by the business judgment rule because the directors made grants in excess of a plan’s limits. The plan at issue was AsiaInfo-Linkage's 2011 Stock Incentive Plan, which set forth individual award limits in a section titled "Section 162(m) Limits," with those limits being applicable only to awards "intended to qualify" as performance-based compensation for 162(m) purposes. AsiaInfo might have obtained dismissal but for a single, unfortunate, sentence in its 2012 proxy CD&A:

"Awards issued under our stock incentive plans … have been structured so that any taxable compensation derived pursuant to the exercise of options granted under such plans should not be subject to these [162(m)] deductibility limitations."

That text led to the court's decision in Halpert v Zhang (D.Del., 8/1/2013):

"Therefore, under the well-pled facts and Asialnfo's own characterization of the challenged grants, Halpert has established a prima facie case that the Board exceeded its authority by awarding more stock options than authorized under the Plan."

The Halpert case consequently serves as another reminder that public companies should take at least three precautions when dealing with the Code §162(m) implications of their stock plans:

  1. Be sure the stock plan itself authorizes, but does not require, the making of awards that qualify for the performance-based award exemption from Code §162(m).
    • Best practice: draft the plan to authorize both stock and cash awards, so that shareholder approval allows the broadest possible flexibility for the making of exempt awards.
  2. In proxy statements and other shareholder communications, make it crystal clear that awards may -- but are not required to -- qualify for an exemption from Code §162(m).
    • Be attentive to this in two places in particular: the initial proposal for shareholder approval of the plan, and the CD&A discussion of Code §162(m).
  3. In operation, be aware that §162(m) requires ongoing monitoring to assure exempt awards occur when desired. For instance, awards other than stock options and SARs generally require –
    • establishment of performance goals within the first 90 days of the performance period,
    • administration by independent (“outside”) directors,
    • their certification of performance results before the performance-based compensation is paid, and
    • shareholder approval or re-approval of the plan every five years . . . even if the plan term has a term of ten years.