Equity award agreements often provide that the awardee will forfeit the awards if they breach various restrictive covenants — usually, non-solicitation, non-competition, and/or confidentiality. These forfeiture provisions can create some challenges for drafters. In May, Liz shared a recent case in which the Delaware Court of Chancery refused to enforce the covenants following the forfeiture of the units, as the agreement explicitly stated that the units were the sole consideration for those covenants.
The 10th Circuit also addressed these terms in an award agreement — and specifically found that the forfeiture provision can be enforceable even when the non-compete itself may not meet the applicable state law’s reasonableness standard. This Proskauer blog describes the facts:
A retirement agreement allowed the former CEO of Spirit AeroSystems (“Spirit”) to receive cash payments and continue vesting in certain stock awards if he continued working for Spirit as a consultant and complied with a non-compete agreement. The CEO subsequently contracted with a hedge fund that was pursuing a proxy contest against one of Spirit’s suppliers. Spirit determined that this activity breached the non-compete and therefore stopped payments to the CEO and cut off continued vesting of the stock, resulting in forfeiture of the CEO’s then-unvested stock awards.
As the blog notes, the court distinguished the forfeiture of future compensation from a traditional penalty for competition.
Under Kansas case law, the former is valid and enforceable only if “reasonable under the circumstances and not adverse to the public welfare.” But the court concluded that Kansas law does not subject the latter to the same reasonableness standard because it does not restrain competition in the same way. Rather than imposing a penalty, a forfeiture for competition provision “merely provides a monetary incentive in the form of future benefits for not competing.” The court reasoned that a forfeiture for competition provision gives the worker “a choice between competing and thereby forgoing the future benefits or not competing and receiving those benefits.” And because the forfeiture applied only to future compensation, it did not amount to a penalty: the executive forfeited only “the opportunity for the shares to vest notwithstanding his retirement.”
The agreement included both a forfeiture-for-competition provision and traditional enforcement rights (to pursue monetary damages and specific performance), but the court found that the two could be severed under the agreement’s terms. The court found that a “forfeiture-for-competition provision should be presumed enforceable” absent the presence of policy concerns — e.g., that imbalanced bargaining power may result in a one-sided non-compete and that overbroad non-competes can have more widespread harm. It found those didn’t apply here and pointed to the specific circumstances of the awardee — a sophisticated executive — and the negotiation — including his support of counsel.
Notably, this is a Federal court applying Kansas law — so the blog notes it’s limited as far as binding authority goes. And some clearly reject forfeiture for competition. But the blog says it provides “meaningful authority for the proposition that a forfeiture for competition provision can be enforced even if applicable law otherwise limits the enforceability of non-compete provisions,” and it provides this drafting tip.
If an agreement has more than one enforcement mechanism (e.g., a right to seek damages and injunctive relief and a separate statement that breach will result in forfeiture of certain compensation or benefits), it is important to make each enforcement mechanism distinct and severable from the others. The result of this case could have been different if the agreement did not have a severability clause.
It also helps to state clearly that amounts subject to forfeiture are not considered earned or fully vested (even if considered vested for tax purposes) unless and until the employee has satisfied all applicable conditions. Clarity on this point helps the court to distinguish between a permissible compensatory incentive to comply and a potentially impermissible penalty for breach.
I’m loving that Mark Borges has returned in force with his “Borges’ Proxy Disclosure Blog.” Members of this site can visit the blog – and can sign up to get that blog pushed out to them via email whenever there is a new entry. All you need to do is click the link on the left side of the blog and enter your email address. Here are a few of Mark’s recent updates:
Mark doesn’t simply flag the disclosure – although even that is helpful! He also adds context and commentary from his years of experience.
If you aren’t yet a member with access to the Borges’ Proxy Disclosure Blog and all of the other resources on this site – such as our checklists, resource libraries, and the essential Lynn & Borges’s “Executive Compensation Disclosure Treatise” – email info@ccrcorp.com, call 1.800.737.1271, or sign up online. There is no risk in trying a membership! During the first 100 days as an activated member, you may cancel for any reason and receive a full refund!
As Bruce Brumberg recently highlighted on myStockOptions.com, the “One Big Beautiful Bill” Act (OBBBA) introduced some tax changes that compensation committees and execs may want to consider when structuring pay programs with stock options and RSUs. One thing to consider is that due to the Bill’s phaseout of the increased SALT deduction, equity vesting dates could impact availability of the deduction. Bruce’s Forbes article on this topic points out that this may also create an “alternative minimum tax” issue for options:
Whenever you exercise incentive stock options (ISOs) and hold the stock, you need to consider whether this will trigger the AMT, as the exercise spread becomes part of your AMT income (AMTI). Dealing with the AMT will be more of a hassle for anyone with ISOs trying to obtain the preferential ISO tax treatment at sale. The denial of the SALT deduction under the AMT rules, where instead it’s added back to your income to increase your AMTI, will now play a bigger role. Given the quirky way in which AMT income is determined, taking SALT deductions up to the $40,000 cap could make it more likely that you will trigger the AMT with an ISO exercise/hold. (For details on the AMT calculation, see an FAQ at the website myStockOptions.com.)
The article also summarizes changes for pre-IPO companies that issue Qualified Small Business Stock (QSBS) after the date of the Bill:
For QSBS, the OBBBA increased the gross-asset test for companies eligible to issue QSBS to $75 million and raised the amount of the capital gain exclusion on your tax return to $15 million. It also added shorter stock-holding periods for the exclusion of capital gain income from taxes. Now there are three tiers:
– 100% exclusion for shares held five years
– 75% for shares held four years
– 50% for shares held three years
The article says that timing will be a big deal, since half of the law comes into effect for 2025, followed by the other half in 2026. That means “creative tax planning” will be in full force this year around stock option exercise strategies, charitable gifts, and deductions.
The biggest takeaway for me in all of this stuff is to remind executives and employees to consult their own tax advisors. Also, don’t forget the possibility of Section 16 issues for tax planning transactions! Alan Dye & Peter Romeo have created a lot of resources on Section16.net about how to report these types of transactions and avoid short-swing foot faults. And check out the memos we’ve posted on this site about the benefits and executive compensation implications of the OBBBA.
The clock is ticking to take advantage of our “Early Bird” rate – a 20% discount on the single in-person attendee fee – for our “Proxy Disclosure & 22nd Annual Executive Compensation Conferences.” That rate expires at the end of the day this Friday – July 25th! You can sign up online or reach out to our team to register by emailing info@ccrcorp.com or calling 1.800.737.1271.
This year, the Conferences are on Tuesday & Wednesday, October 21 & 22, at The Virgin Hotels in Las Vegas. Check out our agenda – 15 sessions over 2 days to equip you with on-point action items for year-end and proxy season. Plus, our format & terrific group of speakers keep things moving & keep it fun. You won’t be checking your watch every 3 minutes or using all your willpower just to stay awake.
We also have even more opportunities to network this year. If you plan to attend in person, be sure to arrive early enough on Monday to attend the Welcome Party + CCRcorp’s 50th Anniversary Celebration, which will take place from 4:00 pm to 7:00 pm PT on October 20th. We can’t wait to celebrate!
We hope to see you there in person, but as always, we have a virtual option for those of you who are unable to travel to Las Vegas for the event. You can sign up online or reach out to our team to register by emailing info@ccrcorp.com or calling 1.800.737.1271.
A few of our members have informed us that the Glass Lewis window for peer group submissions is open – through August 8th – for companies with annual meetings between October 2025 and February 2026. Glass Lewis shares the info by email to the designated company contact, rather than making a public announcement like ISS.
As this Compensia memo explains – and as I blogged last year – not every company needs to submit something during this window. You really only do it if your peer group has changed since your last proxy statement and you want to make sure the proxy advisor considers that.
See Meredith’s blogs from a few weeks ago about why peer groups might change from year to year – and potential changes to Glass Lewis’s methodology. A lot of people are happy that the new methodology will move away from letter grades!
In the latest 26-minute episode of “The Pay & Proxy Podcast,” WTW’s Heather Marshall and Steve Seelig joined me to discuss the SEC’s Roundtable on Executive Compensation Disclosure Requirements. They shared:
– An overview of the roundtable and topics covered
– Recurring themes raised by the panelists
– Surprises about what was addressed – or was not addressed – during the panels
– Specific suggestions for changes to the executive compensation disclosure requirements shared during the panels
– Favorite quotes or comments from the panels
As always, if you have a compensation-related topic you’d like to discuss on a podcast, feel free to ping me at mervine@ccrcorp.com! And if you aren’t already a member of CompensationStandards.com, email info@ccrcorp.com to sign up and access this podcast and all of our archives!
We’ve posted the transcript for our recent CompensationStandards.com webcast, “Proxy Season Post-Mortem: The Latest Compensation Disclosures,” during which Mark Borges, Principal, Compensia and Editor, CompensationStandards.com, Dave Lynn, Partner, Goodwin Procter LLP and Senior Editor, TheCorporateCounsel.net and CompensationStandards.com, and Ron Mueller, Partner, Gibson Dunn & Crutcher, discussed the “lessons learned” from the 2025 proxy season that companies can start carrying forward into next proxy season. The webcast covered the following topics:
– 2025 Shareholder Engagement Challenges– 2025 Proxy Statements – DEI and Other E&S Developments– 2025 Proxy Statements – Executive Compensation Disclosures– Shareholder Proposals– Thoughts on the (then-upcoming) SEC Roundtable
Members of this site can access the transcript of this program. If you are not a member, email info@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
One of the things that keeps coming up in conversations with the attorneys and compensation consultants participating in our podcasts and webcasts is just how much is happening right now in the world of executive compensation. All signs point to 2025 being a challenging year for compensation — compensation committees will likely be grappling with tough decisions come early 2026. And with shareholders modifying their approach to engagement, it’s sometimes more difficult to discern their views.
This year, our conferences are taking place on October 21 & 22 at Virgin Hotels Las Vegas with a virtual option if you are unable to attend in person. If you do plan to attend in person, be sure to arrive early enough on Monday to attend the Welcome Party Celebrating CCRcorp’s 50th Anniversary, which will take place from 4:00 pm to 7:00 pm PT on October 20.
Register now to get a 20% discount on the single in-person attendee fee.This rate expires in less than two weeks, on July 25th! You can sign up online or reach out to our team to register by emailing info@ccrcorp.com or calling 1.800.737.1271.
This recent Cooley blog offers some advice to managing what it calls “pre-IPO purgatory” – the often lengthy period it takes for an IPO candidate to move forward with its offering. The blog’s advice is based on discussions with a tech company CLO who has guided a company through this period. This excerpt addresses issues associated with equity awards:
Managing equity rewards and retention. In these uncertain times, companies are getting creative with equity rewards and retention strategies. Providing limited liquidity for “must be present” restricted stock units (RSUs) is one tool in the box, but this must be applied carefully to balance retention and incentive value alongside cash availability and long-term context. This CLO, for instance, saw a robust secondary market for option holders but faced challenges with RSU holders who couldn’t sell their shares.
Dilution and equity awards. Companies often move from options to RSUs to curb dilution, as RSU awards are full-value awards. However, RSUs come with their own set of challenges, such as the inability to participate in secondary markets. Some companies are now providing both options and RSUs or reverting to granting options to address these issues. Additional complexity is present where 409A valuations are volatile, so this is again an area where you should proceed carefully. Balancing talent retention with dilution pressure is a delicate act.
The blog discusses some alternatives for dealing with RSUs and also stresses the importance of settlement timing and tax withholding.
After years of investors saying that time-based awards don’t count as “pay for performance,” some are starting to see benefits in long-term time based awards as compared to complex performance-based plans. At this point, that would be a big change for many companies, but compensation committees may want to discuss the pros & cons of a simplified structure. This Meridian article summarizes potential benefits of long-term vesting restricted stock as:
– focusing on the sustained health of the company for an extended period after the grant date,
– avoiding complexity that can misfire in volatile markets,
– maintaining retention value through short-term ups and downs, and
– broadcasting the company’s commitment to sustainable, long-term profitable growth.
On the other hand, the memo also summarizes potential challenges of this structure, which include:
– the potential to miss out on candidates who prefer shorter vesting periods offered by other employers,
– a demand for higher cash compensation or grant values to offset delayed equity realization,
– investor concerns that time-vested awards of any kind are not sufficiently based on performance,
– an inability to highlight specific near-term or long-term priorities through incentive payouts, and
– increased stock plan overhang from awards being outstanding for longer periods of time.
For companies that do take a closer look at moving to a compensation program that is more focused on time-based awards, the article also walks through transition issues to consider.