The Advisors' Blog

I blogged earlier this year about Apple’s win in case that alleged a problematic approach to equity award valuations. Even though the company won on that particular claim, this guest post from Orrick’s J.T. Ho says that plaintiffs are continuing to scrutinize disclosures about equity award valuations & assumptions. Fortunately, there may be an easy fix to stay out of their crosshairs. From J.T.:

This proxy season, several companies have faced shareholder complaints requesting disclosure of the assumptions used to determine the grant date fair values of stock-based compensation, calculated using a Monte Carlo simulation in accordance with FASB ASC Topic 718.

The basis of this complaint is Instruction 1 to Item 402(c)(2)(v) and (vi) of the Summary Compensation Tables rules, which requires companies to “include a footnote disclosing all assumptions made in the valuation by reference to a discussion of those assumptions in the registrant’s financial statements, footnotes to the financial statements, or discussion in the Management’s Discussion and Analysis.” The requested information includes assumptions such as the expected volatility, risk-free interest rate, dividend yield, and expected life of the performance-based stock awards.

Many companies do not include all this information in their footnotes to the Summary Compensation Table or footnotes to the financial statements in the Annual Report on Form 10-K, which are referenced in the Summary Compensation Table footnotes. However, since the requested information should be readily available and is generally not sensitive, companies are advised to consider whether to modify their footnotes to the Summary Compensation Table to mitigate against such claims.

For a couple of examples of how companies are supplementing their disclosures, check out the additional materials filed by NetScout Systems and LiveRamp Holdings.

– Liz Dunshee