The Advisors' Blog

Troutman Pepper recently released this memo regarding equity award delegations after the 2022 and 2023 DGCL amendments, which we’ve previously blogged about here and on TheCorporateCounsel.net. Here’s helpful background from the memo as a reminder:

Section 152(b) of the DGCL governs the board’s delegation of its authority to issue capital stock (which includes grants of restricted stock awards), and Section 157(c) governs options and rights (most commonly, time-vesting and performance-vesting restricted stock units (RSUs)). Historically, there was a misalignment between Section 152 and Section 157 of the DGCL, which resulted in boards having more flexibility to structure delegations to grant restricted stock awards than delegations to grant options or RSUs.

The DGCL was previously amended, effective August 1, 2022 (the 2022 amendments) to address this issue, giving boards greater flexibility to structure delegations for all types of equity awards. While the 2022 amendments were welcomed by practitioners, the amendments raised certain ambiguities and interpretive questions, as discussed in our prior client alert. The 2023 amendments seek to provide more clarity on the DGCL requirements for structuring a delegation to grant equity awards.

The memo then goes on to review the old ambiguities and the clarifications in the 2023 amendments. Here are excerpts related to two of those ambiguities:

Under the 2022 amendments, the board was required to fix both (i) a cap on the maximum number of options or RSUs that may be granted by the delegate, and (ii) a cap on the maximum number of shares issuable pursuant to the delegation. Clause (i) created interpretive confusion as it was unclear what additional cap was required above and beyond establishing a maximum number of shares issuable pursuant to awards granted by the delegate. The 2023 amendments address this issue by eliminating clause (i) from the DGCL. Therefore, the only cap that is required in the authorizing resolutions is a maximum number of shares issuable pursuant to awards granted by the delegate.

The 2023 amendments seek to clarify that there are two time periods that should be fixed in the authorizing resolution, which may be different: (i) a period during which the delegate is authorized to grant options or RSUs, and (ii) a period during which shares may be issued in respect of those options or RSUs. To fulfill the first requirement, the board must establish a time period during which the delegation to grant awards remains in effect (e.g., the delegate may grant awards for five years following the effective date of the resolutions). To fulfill the second requirement, the board must establish a time period during which shares may be issued in respect of options or RSUs granted pursuant to the delegation.

While setting the time period for delivery of shares is often straightforward for options, the memo discusses complications for RSUs — for example, when settlement can be deferred. It ends with this reminder regarding delegating to a one-director committee:

Sections 152(b) and 157(c) of the DGCL are not the exclusive method for setting up an equity award delegation in Delaware. If a company’s CEO sits on the board, for example, the board may create an “equity award committee” comprised of one director — the CEO — who is authorized to grant equity awards to nonofficers. Because the delegation rules of Sections 152(b) and 157(c) do not apply to the delegation of grant-making authority by a board to a committee of the board, these rules would not apply when establishing the equity award committee. While certain formalities must still be followed and safeguards must be put into place, this alternative delegation method is attractive to many companies whose governing documents allow it.

– Meredith Ervine