The Advisors' Blog

– Broc Romanek

Here’s an excerpt from this blog by Morgan Lewis’ Gina Lauriero & Amy Pandit:

The following equity plan provisions should be considered:

– Companies should review their equity plans and confirm whether such plans permit share withholding in excess of the minimum applicable tax rate.
– Shareholder approval is not generally required to amend an equity plan to permit share withholding in excess of the minimum applicable tax rate. However, because of certain stock exchange rules and in light of recent Institutional Shareholder Services (ISS) guidance, a company with a plan that permits withheld shares to be added back to the plan’s share reserve should consider whether to limit the number of shares that can be added back for withheld taxes.

There are several securities law issues that can affect share withholding for taxes by Section 16 of the Securities and Exchange Act of 1934 (Section 16) officers, including the following:

– In order to exempt the disposition of shares through share withholding from being a “sale” of shares under Section 16 (the short swing profit rules), a company’s compensation committee or board of directors must approve the share withholding before any shares are withheld for Section 16 officers. The resolutions authorizing share withholding should be as specific as possible.
– The company should not retain discretion to determine whether shares will be withheld, or the amount of share withholding, for Section 16 officers.
– Share withholding for Section 16 officers should not exceed the participant’s estimated tax obligations attributable to the award, in order to avoid creating a separate derivative security.

Unresolved Section 16–related litigation has been instituted with respect to open market purchases occurring within six months of share withholding transactions (even though the transactions were reported as exempt). Until this issue is resolved, Section 16 officers should carefully consider whether to engage in nonexempt purchases of company stock in the six months before or after a tax withholding share transaction.