The Advisors' Blog

– Broc Romanek

Here’s some information from Vicki Westerhaus of Stinson Leonard Street that should help you consider whether to adopt ASU 2016-09 & how to implement maximum share withholding (also see this Mike Gettelman blog on TheCorporateCounsel.net summarizing the discussions on this topic at last week’s NASPP conference):

1. Stock Exchanges

Last week, Nasdaq issued new FAQ #1269 confirming that an amendment to an equity compensation plan to allow for increased withholding to satisfy tax obligations, such as from the minimum tax rate to the maximum tax rate, would not be considered a material amendment to the plan, so we now have confirmation from both Nasdaq and NYSE that stockholder approval of the amendment is not required. (NYSE earlier this year issued a similar FAQ on its website clarifying that an amendment to allow tax withholding above the minimum tax withholding is not a material amendment.) [This note from Exequity’s Ed Hauder also delves into the NYSE & Nasdaq’s guidance (or lack of guidance).]

2. Insider Trading Policy Issues

Whether a change in withholding rates can implicate insider trading issues is a grey area and can depend upon whether shares withheld are sold into the market in a broker-assisted transaction or withheld in a transaction involving only the company/issuer. Many insider trading policies include carve outs for tax withholding, although companies should consider mandatory vs. voluntary (at award recipient’s discretion) alternatives.

From an insider trading standpoint, mandatory withholding is arguably a more conservative approach because there is no decision to be made by an award recipient. If a company allows an insider to choose between satisfying his or her withholding obligations by paying cash or withholding shares, the appearance of manipulation is possible, especially if a person knows company stock will likely fall as a result of an upcoming announcement. By removing the choice, a company can help avoid the appearance of insider trading. A middle ground could be a combination of methods, such as a default tax payment method (e.g., withholding at applicable supplemental rates only) with no changes permitted during a blackout period. Companies also should consider adding Rule 10b5-1 language with respect to tax withholding provisions in grant agreements to help secure an affirmative defense against allegations of insider trading.

3. Section 16 Issues

An insider’s election to have increased share withholding to satisfy tax withholding obligations in excess of the minimum statutory withholding rate would be nonreportable for Section 16 purposes, so long as the amount withheld applies only to the tax obligation generated by the underlying award transaction. If an insider elects to have shares withheld in an amount above the tax obligation, the excess amount would be deemed a reportable derivative security. The actual withholding of shares for tax purposes would continue to be a reportable event, subject to an exemption from the short swing profit provisions of Section 16(b), if the share withholding was approved by a properly composed Compensation Committee or Board.

4. Applicable IRS Rules

As noted above, under current IRS rules, awardees are not permitted to have discretion to determine the applicable tax withholding percentage. Instead, companies must either apply the withholding rate generated by a grantee’s current Form W-4 filing or apply the applicable flat supplemental rate. A grantee, however, may file a revised W-4 from time to time to change the number of exemptions, but as noted above, to avoid the appearance of possible insider trading, a grantee should not file a revised W-4 during a blackout period.