The Advisors' Blog

Share counting on Form S-8 is not always a straightforward exercise. In fact, we have an entire checklist explaining how to do it. But sometimes, even with the best of effort, mistakes happen. What happens then?

Yesterday, the SEC posted this administrative proceeding order about a company that discovered it had sold shares pursuant to an ESPP in excess of the number registered on its Form S-8 registration statements. My stomach always sinks when I read about over-issues – record-keeping may be out of the securities lawyer’s hands, but any clean-up will be in their court.

I was relieved to see that in this case, the company handled it well and the story had a (relatively) happy ending – with a cease-and-desist order and no civil penalty. According to the SEC, here’s what led to the over-issue:

– During the Relevant Period, the company did not have policies addressing the need to keep an accurate count of shares sold under the ESPP. While the company had legacy procedures for operating the ESPP and for preparing its annual proxy statement (which, as described in the order, included a disclosure of shares remaining for sale under the ESPP), these procedures, implemented prior to the Relevant Period, were not adequate to ensure that the company kept accurate records of shares sold under the ESPP.

– The company hired a third party to administer the ESPP – that party committed, among other things, to “maintain share lot history” and provide regular reports to the company. There were monthly letters about the purchases and sales, but the company didn’t use those letters to track the shares remaining available for issuance.

– During the Relevant Period, once a year, consistent with its legacy procedures, in connection with the preparation of its proxy statement, the company asked the service provider to indicate how many shares it had sold under the ESPP in the most recent calendar year. The company subtracted this figure from the “shares remaining” figure on the latest proxy statement, and input the result into the new proxy statement. The company did not otherwise track the number of shares remaining for sale under the ESPP during the Relevant Period. At some point, this figure became inaccurate.

– In connection with preparing a new S-8, the company asked the service provider to provide a complete record of all shares sold under the ESPP since inception. That spreadsheet indicated that the company had sold shares in excess of the aggregate number of shares it had registered on the Form S-8 registration statements.

Here’s what the company did next:

– Upon discovery of the violation, the company promptly suspended the ESPP and conducted an investigation.

– The company then self-reported the violation to the Commission and voluntarily initiated a rescission offer to provide compensation to all affected current and former employees for all shares sold in excess of the ESPP registration, even including as eligible securities for which actions would otherwise have been barred under Section 12(a)(1) of the Securities Act.

– Following the self-report, the company also voluntarily produced relevant factual information and documentation to the Commission staff.

The order is a good case study on firming up controls. And while every enforcement proceeding is unique and YMMV depending on many circumstances, the company’s response also seems to provide a good roadmap for addressing an S-8 overissue.

At our upcoming “Proxy Disclosure & 23rd Annual Executive Compensation Conferences,” I’ll be moderating a “campfire” discussion of scary securities law stories – with Howard Dicker of Weil Gotshal, JT Ho of Cleary Gottlieb, and Allison Handy of Ashurst Perkins Coie. These seasoned practitioners will regale us with their own tales of over-issues and other mishaps they’ve seen – and give pointers on how to resolve them. Join this session in Orlando (or virtually) on October 12th at 11:30 a.m. ET – it will be sure to put you in the Halloween spirit! You can still register for the Conferences – online, by email to info@ccrcorp.com or by calling our team at 800-737-1271. Don’t wait – the Conferences are only two weeks away!

– Liz Dunshee