The Advisors' Blog

With the new disclosure requirements under Item 402(x) coming online for calendar-year companies in the 2025 proxy season, companies are bracing for more scrutiny of equity grant practices. Even if everything is on the up & up, the new disclosures could invite questions and second-guessing that most of us would prefer to avoid.

This DLA Piper memo offers several housekeeping tips to help ensure that awards are granted and structured in a way that avoids MNPI and accounting issues, or other challenges. Here’s an excerpt:

Implement a formal equity grant policy. Adopt a written equity grant policy that outlines the terms and procedures that must be followed when making an equity grant, including authority and delegations, timing, and communication of awards. This should be considered comprehensively with other policies and procedures, such as the insider trading policy and nonemployee director compensation policy, to ensure such policies work together properly and can be disclosed in a clear and consistent manner.

Delegate authority responsibly. To optimize the impact of awards and ease administration, the compensation committee may wish to delegate certain authority to subcommittees, management, or third parties to administer or implement equity grants. Because the purpose of compensation committees, however, is to provide independent oversight of management and compensation programs, any such delegation should be formally approved by the committee and subject to appropriate oversight, limits, and reporting. Confirm that any such delegation is permitted by the compensation committee’s charter, the plan itself, and any applicable laws or regulations.

Mitigate insider trading risks with timing of grant or settlement of awards. Consider utilizing pre-established grant dates that coincide with regular board or committee meetings, or occur shortly after the release of quarterly or annual financial results, to avoid concerns that the company misused material nonpublic information (MNPI) that is not reflected in the grant date fair value of the award. A “spring-loaded” award that enjoys an immediate lift in value when earnings are announced may frustrate investors, create accounting complexity, and prompt legal challenges, while an award that immediately decreases in value after earnings may lose its intended incentivization effect.

Additionally, consider whether the future vesting and settlement of the award could create insider trading considerations. It is common for tax withholding obligations to be funded by “sell to cover” transactions into the open markets, which generally should not occur when there is MNPI. However, companies can develop strategies in advance to address such situations, such as the use of Rule 10b5-1 trading plans, automatic withholding of shares upon vesting with a value equal to the amount of withholding taxes, timing vesting schedules to align with “open” windows, or deferring settlement of vested awards subject to limitations under Section 409A.

As Meredith shared last week, there are some nuances in the disclosure rule that companies should consider even if they don’t grant options or SARs. That was one of the topics that we covered in our recent webcast on upcoming proxy disclosures – which is available on-demand for members of CompensationStandards.com.

– Liz Dunshee