The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

July 5, 2018

How to Correct a Stock Award Agreement

Liz Dunshee

In our “Q&A Forum,” a member recently asked (#1229):

Has anyone dealt with issues relating to a company making a grant under one stock incentive plan but inadvertently documenting the grant using an award agreement related to a different (former) stock incentive plan? If so, how was it handled?

This was my take:

In this situation, both the company and the participant benefit from having the award properly documented. For the company, if there are big differences between the forms it’s risky to issue an award with different terms than what was approved by shareholders and registered with the SEC. And in any event, it’ll be an administrative pain if you have an award floating around with slightly different terms. For the participant, it’s inaccurate and confusing for the award agreement to refer to the prior plan – even though the award is no doubt accounted for in minutes and the company’s equity plan software, they’ll show up in a few years to get their stock and people might scratch their heads and have to comb through records to make sure they’re really entitled to it. And if you have any sort of corporate transaction in that time, it could be even more of an issue.

So even though it’s somewhat embarrassing in the short-term, I’d have the parties execute an amended and restated agreement. You can add a recital acknowledging that the parties previously entered into an agreement for the award but made a clerical error and wish to conform the agreement to what’s permitted by the applicable plan. If there’s reluctance to do that, then at the very least I’d try to get an amendment that corrects the name of the plan under which the award was granted and an analysis of whether the terms of the old form would be permitted by the current plan (including any necessary corrections in the amendment, and reporting any material differences on an 8-K if the person is a PEO, PFO or NEO).