The purpose of this post is to remind the reader to carefully think about the number of shares that should be registered under a Form S-8 Registration Statement. As highlighted in this post, the number of shares to register is likely larger than the number of shares available under the issuer’s equity incentive plan.
Background
- The purpose of a Form S-8 is to register both the “offering” and “resale” of equity securities granted under the issuer’s equity incentive plan (i.e., if the equity securities are not covered by a Form S-8, then any resales of the equity securities would be subject to Rule 144 resale restrictions).
- Equity incentive plans with liberal share counting provisions (i.e., provisions that allow for forfeited shares to revert to, and replenish, the equity plan’s share reserve) are counted or depleted on a net basis.
- In contrast, shares registered under a Form S-8 are counted or depleted on a gross basis (i.e., shares that are forfeited reduce the number of registered shares that remain available on a 1 for 1 basis).
Issuers Should Register More Shares than Set Forth under the Equity Incentive Plan
The Form S-8 should always cover more shares than are available under the issuer’s equity incentive plan. Reason is that the shares under the Form S-8 deplete at a faster rate, and this depletion disparity can be highlighted with the following example:
- Assume an issuer’s equity incentive plan has a share reserve of 600,000 shares.
- Assume the issuer’s equity incentive plan has liberal share counting provisions under which forfeited awards are returned to, and act to replenish, the equity incentive plan‘s share reserve.
- Finally, assume the issuer grants 80,000 shares to Employee Bobby. Later, Employee Bobby forfeits 60,000 of such shares because he failed to fully satisfy the vesting criteria, and as a result of the liberal share counting provisions, the 60,000 shares that are forfeited return to, and act to replenish, the equity incentive plan‘s share reserve.
The above example highlights that 580,000 shares remain available under the issuer’s equity incentive plan (600,000 - 20,000 ultimately granted, i.e., net counting), but that only 520,000 shares remain covered by the issuer’s Form S-8 (600,000 - 80,000 initially granted, i.e., gross counting). The result is that over time an issuer could find itself in the position of having shares available for issuance under its equity incentive plan and NOT knowing that no shares remain covered by the Form S-8 Registration Statement. This answer could have been avoided had the issuer initially registered more than 600,000 shares under the Form S-8 Registration Statement and separately tracked on a gross counting basis the share depletion from the Form S-8.
*****
PartnerTony’s multi-disciplinary legal practice focuses on executive compensation, ESOPs and employee benefit arrangements (including their related tax, accounting, securities and corporate governance issues) in the United ...
You May Also Be Interested In
It is common for a key employee to be offered an opportunity to purchase equity of the employer. Often the key employee can personally finance such purchase. And sometimes the employer will help the key employee finance the purchase by providing him or her with a loan equal to the purchase price. The purpose of this Tip of the Week is to remind readers that a substantial part of the loan should be recourse.
- Risk Associated with 100% Non-Recourse Note - Key Employee Received an Option. If the loan is 100% non-recourse (meaning the key employee has no personal assets at risk other than the ...
Did you exercise (or are planning to exercise) an incentive stock option (“ISO”) during calendar year 2018? Do you intend to sell the underlying stock within the 12-month period from the date you exercised the ISO? If you answered yes to both of the foregoing questions, then as part of your tax planning, consider whether the underlying stock should be sold during calendar year 2018 in order to minimize your alternative minimum tax (“AMT”) exposure.
It is difficult for publicly-traded issuers to solve the problems associated with outstanding stock options that are "underwater" (i.e., underwater because the exercise price of the stock option is greater than the fair market value of the underlying shares). None of the typical solutions are attractive to publicly-traded issuers. As a result, the underwater stock options continue to exist for 10 years from the date they were granted, and continue to decrease the life expectancy of the equity plan's share reserve. But what if a compensatory design existed that, if implemented on the front end, could negate the possible future existence of outstanding stock options that are substantially underwater? Would such a design be attractive to an issuer so long as the design did not destroy the retention value otherwise inherent in the stock option? Could a stock-price forfeiture provision be a solution to the foregoing problem? Discussing a stock-price forfeiture provision as a possible solution to negate substantially underwater stock options is this "Tip of the Week."
All publicly-traded issuers have (or should have) a blackout policy that prohibits a designated individual from engaging in open-market transactions whenever such individual possesses material non-public information. But what if the issuer is always (or near always) in a blackout period? How does the issuer satisfy its income tax withholding obligation if the individual cannot finance the obligation through other means (e.g., family money, borrowings, etc.) and the individual is prohibited from financing the obligation by selling shares in the open market? Answers to these questions are discussed in this Tip of the Week (presented in NO particular order, and not intended as an exhaustive list).
Search
Recent Posts
Categories
Tags
- 10b5-1 Trading Plans
- 83(b) Election
- Accounting
- Blackout Period
- Business Judgement Rule
- Change-in-Control Pay
- Clawback
- Compensation
- Compensation Committee
- Compensation Design
- Compensation Governance
- D&I Initiatives
- Deferred Compensation
- Director Compensation
- Diversity and Inclusion
- Emerging Growth Company
- Employee Stock Purchase Plans
- Employer Stock
- Employment Conditions
- ESPP
- Executive Compensation Disclosure Rules
- Executive Contracts
- Form S-8
- Incentivize and Retain
- IPO
- IRS Guidance
- ISOs
- ISS
- Limited Liability Company
- loan
- Net Withholding
- Partnership
- Pay Ratio
- Performance-Based Compensation
- Placemats
- Plaintiff Actions
- Proxy Advisory Firms
- Proxy Season
- recourse
- Rule 701
- SEC registration
- SEC Rules
- Section 16
- Section 162(m)
- Securities and Exchange Commission
- Shareholder Value
- Stockholder Ratification
- Tally Sheets
- Tax Tips
- Tender offer
- Tip of the Week
- Total Shareholder Return
- Webinar