The Advisors' Blog

This FW Cook blog contains a helpful discussion of two of the recently released PvP CDIs. Those are CDI 128D.18 on retirement eligibility and when an award is vested and CDI 128D.22 regarding the requirement to disclose changes in equity award valuation assumptions and the application of the exception in instruction 4 to Item 402 for competitive harm.

CDI 128D.22 addresses the requirement in Item 402(v)(4) to disclose in a footnote “any assumption made in the valuation that differs materially from those disclosed as of the grant date of such equity awards.” While not directly addressed by the CDI, the FW Cook team believes it implies that the SEC interprets this requirement as eliciting more expansive disclosure than many companies and advisors believed in the 2023 proxy season — specifically, that a change in the probable outcome of a PSU from the grant date to the reassessment date might constitute a “materially different assumption” that needs to be disclosed in a footnote. Based on this reading, when a company seeks to omit footnote disclosure of changes in assumptions due to competitive concerns, “while it is hard to tell what is now required […] it seems clear that CDI 128D.22 requires some type of footnote disclosure if the company was relying solely on the competitive harm exception and the probable performance outcome is now significantly different than target.”

On CDI 128D.18, the blog says:

This language appears to indicate that, if retirement eligibility is the only vesting condition, vesting occurs for purposes of determining CAP in the year during which the holder first becomes retirement eligible, regardless of whether the holder terminates employment.  For example, if a grant recipient already meeting the applicable definition of retirement (typically a combination of age and years of service) receives a time-based restricted stock unit (RSU) award that contains favorable retirement vesting provisions and there are no additional vesting conditions other than service, then the award is considered vested on the grant date.

However, the CDI also refers to the need to consider other “substantive conditions,” and the blog goes on to say that what might constitute such a condition isn’t crystal clear:

The SEC did not include an exhaustive definition of such “substantive conditions” but noted it includes a “market condition,” and we can think of no reason why financial performance goals could not also qualify as substantive conditions.  Therefore, an RSU with favorable retirement vesting does not become vested for CAP purposes upon retirement eligibility if the award is also subject to the achievement of a market condition, such as a three-year relative total shareholder return goal, provided the payout is tied to actual performance results (if, instead, payout is based on the target award regardless of performance results, then the performance goal is no longer a substantive condition).

It is less clear what else may constitute a substantive condition.  For example, would a required notice period (prior to retirement) or compliance with restrictive covenants constitute such a substantive condition?  Another question is whether a condition is determined to be “substantive” is always the same or depends on the circumstances of the executive.  If a retirement eligible holder is 55 years old, a covenant not to compete might be considered substantive since that holder may potentially seek employment elsewhere, while a holder who is 72 years could generally be considered less likely to pursue post-retirement employment. Companies should also consider whether their equity awards contain a requisite minimum service period (usually six to 12 months) following grant, before favorable retirement treatment becomes available.

We’ve repeatedly recommended here that companies start thinking now about what needs to change for year two of PvP. I would add these interpretive issues to your list of things to discuss with your advisors — or conversations to have with your clients — earlier rather than later to understand and address how they apply to each company’s unique circumstances.

– Meredith Ervine