July 20, 2021
Equity Compensation After Delisting or Uplisting
Most clients intuitively understand that delisting – or uplisting – will affect equity compensation plans, but forward-thinking advisors will also take a moment to highlight some of the less obvious nuances. This Thompson Hine memo (pg. 3) walks through how these events affect plan metrics, compliance, and the value of awards to employees. Here are the high points:
1. Metrics: If your stock is quoted on an over-the-counter market following delisting, your stock price may no longer accurately reflect the company’s true value. In such circumstances, different performance metrics (such as EBITDA) may be more appropriate for equity programs. Newly listed companies should make sure to look at peer data.
2. Employee Incentives: Delisting may reduce the attractiveness of equity incentives. First, your stock price may not be aligned with the company’s true value. Second, if after delisting the company also deregisters with the SEC (so-called “going dark”), the shares that employees receive upon exercise of their stock options or vesting of restricted stock will no longer be freely tradeable. Resale restrictions generally include a minimum one-year holding period. Third, if the company previously had any institutional investors, they may exit their positions in the company’s stock, and some brokerage firms may be unwilling to hold OTC securities.
3. Blue Sky Compliance: Using equity after going dark requires an exemption from registration under federal and state securities (known as “blue sky”) laws. Securities anti-fraud rules also continue to apply. The company will need an exemption from registration both to grant any future equity awards and to permit employees to exercise any stock options that may be outstanding at the time of going dark. Such an exemption is usually available, but companies should work with legal counsel to evaluate the eligibility criteria and any restrictions. In addition to federal laws, many states require a notice filing and a few states (such as California) impose more complexities.
4. Public Disclosures: Even after going dark, the company may want to provide scaled-down reports. Public information is necessary for sales by affiliates under securities resale laws.
5. Shareholder Numbers: After going dark, monitoring shareholder numbers is also important – if certain thresholds are crossed, the company will be required to reregister and file reports with the SEC.
– Liz Dunshee