The Advisors' Blog

– Liz Dunshee

We’ve gotten a few questions about whether companies that have “grandfathered” performance-based awards are continuing to adhere to Section 162(m)’s five-year reapproval requirement for performance criteria. On Tuesday, the IRS issued initial guidance about the operation of the “grandfather” rule (see this blog from Mike Melbinger).

While the guidance provides some good insight into the definitions of a “written binding contract” (beware any “auto-renew,” “negative discretion” or “contingent-on-approval” provisions) and a “material modification” (you can’t increase pay through a supplemental agreement) – it doesn’t squarely address the shareholder approval question. This Debevoise memo suggests that it’s a good idea to reapprove the performance criteria if awards are contractually promised but not yet granted:

Grandfathered arrangements that rely on the performance-based exception must continue to comply with the formal procedures previously applicable to performance-based compensation. For example, if an executive had a contractual right as of November 2, 2017 to receive a performance-based award in the future, the performance criteria applicable to such award may need to be re-approved by shareholders if, when the award is granted, five years have passed since the last shareholder approval.

But this Covington memo notes that Section 162(m) proposals have been pretty rare this year, at least among the S&P 100. It’s a small sample size, but it appears that the “promised but not granted” fact pattern isn’t very common – and at least some companies decided that shareholder approval of performance criteria is no longer necessary. Here’s an excerpt:

Based on our review of the S&P 100, fourteen companies had last submitted the performance criteria in their equity incentive plans to a shareholder vote in 2013, and two had last submitted criteria for their cash-based plans in 2013, meaning that prior to the TCJA, section 162(m) generally would have required these plans to be put to another shareholder vote in 2018 to allow the company to continue to exclude performance-based compensation from section 162(m)’s deduction limit.

After reviewing these companies’ 2018 proxy statements, we found that only four of the fourteen companies submitted their equity plans to a shareholder vote in 2018. Nine companies did not do so, while one company has not yet held its annual meeting. Of the cash-based plans, neither was submitted to a shareholder vote.