The Advisors' Blog

We’ve recently bombarded you with considerations for compensation programs in times of great volatility and uncertainty — related to everything from 409A valuations, flexibility in pay programs, trailing average prices to determine grant sizes, handling underwater options and how to think about adjustments. This Cooley alert has even more! Here are some other things to think through — if you haven’t already.

Preserve company cash if appropriate. Market uncertainty can often strain a company’s cash resources, or at least reinforce the need for prudent cash flow management. Companies should consider whether they have the flexibility to settle awards in equity rather than cash, mindful that doing so can trigger significant securities law, accounting and disclosure consequences. In addition, companies should work with equity plan administrators to evaluate the availability of net settlement for exercise price payment or tax withholding purposes, and perhaps consider limiting the availability of at least net exercise price payment to only individuals subject to Section 16 reporting requirements.

Assess adequacy of share reserves. Companies should confirm the number of shares available under their equity incentive compensation plans, including employee stock purchase plans (ESPPs), to ensure that sufficient shares remain available for purchase, particularly if there has been a steep drop in price since the share pool was last assessed (or, in the case of an ESPP, since the commencement of the current offering period). Similarly, if there are individual or aggregate award limits under a plan based on share number, those may need to be revisited to ensure that they continue to provide adequate headroom.

Review ESPP documents. ESPP documents often contain provisions that either automatically or at the discretion of the plan administrator will cancel an offering period and start a new offering period if the stock price on the purchase date is lower than the stock price on the offering period commencement date. ESPP documents should be reviewed to determine whether they contain an automatic or permissive restart feature. Companies with plans that do not currently utilize an automatic or permissive restart feature should consider whether to include such a feature in future offerings to preserve shares.

– Meredith Ervine