02.19.2004
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Updates
In response to an American Bar Association request for guidance, the SEC recently issued interpretive guidance and clarifications addressing equity compensation plan disclosure issues under Regulation S-K, Items 201(d) and 601(b). The SEC's interpretive guidance and clarifications included:
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Guidance on aggregation of narrative description and filing of non-shareholder-approved individual equity compensation arrangements;
- Treatment of a non-shareholder-approved amendment to add more securities to a shareholder-approved plan;
- Disclosure required for assumed equity compensation plans; and
- Proper location for the equity compensation plan information disclosure required by Item 201(d).
This Update highlights the key guidance on these disclosure issues covered in the SEC's interpretive letter.
Background
SEC Requires Tabular Disclosure of Equity Compensation Plans
Item 201(d) of Regulation S-K requires a company to disclose in its annual report on Form 10-K (or Form 10-KSB)–or in its proxy statement if the company is seeking approval of any compensation at a shareholder meeting–tabular information about its existing equity compensation plans and arrangements, including the number of outstanding options or rights and the number of securities available for future grant. A company must disclose this information on a separately aggregated basis for each type of equity compensation: shareholder-approved equity compensation and non-shareholder-approved equity compensation.
SEC Also Requires Narrative Disclosure of Non-Shareholder-Approved Equity Compensation
Item 201(d) also requires a company to identify and describe briefly in narrative form the material features of any non-shareholder-approved plan or arrangement that was in effect at the end of the last completed fiscal year.
Each Non-Shareholder-Approved Equity Compensation Plan Must Be Filed as an Exhibit to Form 10-K
Item 601(b)(10)(iii)(B) requires a company to file with the SEC a copy of any non-shareholder-approved equity compensation plan or arrangement in which any employee or other service provider participates, unless the plan or arrangement is immaterial in amount or significance.
Aggregate Narrative Description Permitted for Materially Similar or Identical Individual Compensation Arrangements
A company may describe equity compensation arrangements that are identical or materially similar (other than with respect to number of securities covered, price and vesting schedule) in a single narrative description, but must also disclose for each arrangement:
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the number of securities covered;
- prices at which securities may be purchased; and
- vesting schedules.
Prices and vesting schedules may be disclosed on an aggregate basis if they are identical.
Disclosure of Recipient's Name and Number of Shares Required Only for Officers and Directors
A company must name each director or officer subject to an individual equity compensation arrangement, e.g., inducement awards that are granted outside the company's shareholder-approved plans, and disclose the number of securities covered for each director or officer. Note that "officer" for these purposes is defined in Rule 16a-1(f) under the Securities Exchange Act of 1934.
Otherwise, the company is not required to
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name the individual recipient of an award or
- disclose the number of securities covered by each individual arrangement.
The company may instead disclose the total number of individuals and the total number of securities covered by those arrangements.
"Form" of Individual Equity Compensation Arrangements May Be Filed, Except for Directors and Officers
Just as for other exhibits, where individual equity compensation arrangements for individuals who are not officers or directors are identical or materially similar (other than with respect to number of securities covered, price and vesting schedule), instead of filing each agreement, a company may file
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a "form" of agreement that reflects the materially similar or identical arrangements and
- an appendix specifying the differences between the individual compensation arrangements–number of securities covered, price(s), and vesting schedule–but not the names of individual recipients or the number of securities subject to each arrangement.
Arrangements entered into after filing this "form" exhibit can be added by filing an appendix for the new arrangements that identifies the filing and exhibit number where the "form" of agreement previously was filed.
- For directors and officers, a copy of each individual equity compensation arrangement must be filed.
Increasing Number of Securities Available Under a Plan Does Not "Taint" the Old Securities
If an equity compensation plan previously approved by shareholders is amended without shareholder approval to increase the number of securities available for issuance under the plan, only the new securities will be considered a "compensation plan not approved by shareholders" for purposes of the required disclosure of equity compensation plans, if the company maintains a separate count of the portions of the plan that were approved by shareholders and those not approved by shareholders.
- Note that companies listed on the New York Stock Exchange or Nasdaq are required to obtain shareholder approval for any increase in the number of securities reserved for issuance under an equity compensation plan.
How to Report Plan Increase in Tabular Disclosure
In the required tabular disclosure, a company should:
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include the portion of the plan that was previously approved by shareholders in the tabular disclosure row for compensation plans approved by shareholders;
- include only the newly authorized shares in the row for compensation plans
- explain this treatment in a footnote to the table.
Equity Compensation Plan Assumed in an Acquisition Transaction Without Separate Line Item Approval by the Company's Shareholders Is Treated as Non-Shareholder-Approved if Company Reserves Right to Make Additional Awards Under Plan
A company is required to treat as "not approved by security holders" a plan assumed in connection with a merger, consolidation or other acquisition transaction if
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the company reserves the right to make subsequent grants or awards of its shares under such plan and
- the assumed plan was not subject to separate line item approval by the acquiring company's shareholders.
Otherwise, the company is only required to disclose in a footnote to its tabular equity compensation plan disclosure the total number of shares to be issued upon the exercise of outstanding awards under the assumed plan and the weighted-average exercise price.
Proper Location for Equity Compensation Plan Disclosure
Proxy Statement
The Item 201(d) disclosure regarding equity compensation plans must appear in the company's proxy statement if shareholder approval is sought for any equity compensation or any cash compensation,such as where shareholder approval is sought to qualify cash compensation as performance-based and therefore not subject to the $1 million limitation on compensation deductible by the company under Section 162(m) of the Internal Revenue Code.
A company may provide this disclosure in its proxy statement even if not required to do so, and may incorporate this disclosure by reference into its annual report on Form 10-K (or Form 10-KSB).
Form 10-K
If the Item 201(d) disclosure regarding equity compensation plans is not required to appear in a company's proxy statement, it may instead be included in the company's annual report on Form 10-K under Part III, Item 12 (or under Part III, Item 11 of Form 10-KSB).
This disclosure should not appear in Part II, Item 5 of a company's annual report on Form 10-K (or Part II, Item 5 of Form 10-KSB).
Text of the Interpretive Letter
This Update is only intended to be a summary of the highlights of the interpretive letter. You can find the full text of the interpretive letter and the ABA request letter at http://www.sec.gov/divisions/corpfin/cf-noaction/aba013004.htm.
You can find a general discussion of recent developments and recent laws, regulations and rule proposals of interest to public companies on our website.
