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Plan Administrator Defined

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April 11, 2019 | Jennifer Namazi

Plan Administrator Defined

If you’ve ever read a stock plan (and I’m guessing that if you’re reading this, you likely have) you know that within the plan there is usually a designated “administrator.” That plan defined administrator is not to be mistaken for those of us stock plan administrators who are tasked with daily execution of the activities under the plan (yes, using similar names to label both roles raises the level of confusion.) What is the role of the plan administrator identified in the stock plan document, and why do companies sometimes make decisions that conflict with the plan? Let’s explore both in more detail.

Know Who the Plan Defines as the Administrator

The stock plan is a contractual document that contains the general rules that are common to all participants in the plan (whereas the grant agreement contains terms specific to an individual participant’s award or grant.) The plan is approved by the company’s board of directors and almost always by the company’s shareholders as well. Terms set forth within the plan document include things like the total number of shares available for issuance, who is eligible to receive equity, the types of awards that can be issued, what happens when a participant changes their employment status (terminates employment, for example), and the circumstances that would trigger a plan amendment or termination (among other things). Determining the decision-making scope and role of the “administrator” for the plan is no light matter. The administrator is typically a person or group persons who is/are tasked with running the plan at its highest level, including approval of key decisions related to the plan and executing or interpreting its terms. Sometimes the definition of administrator is crystal clear – e.g. “the board of directors.” Other times, more digging may be required to figure out who is actually the administrator, especially if the plan does not clearly define the role or it allows for delegation of the role (to a subcommittee of the board, for example). If you are unsure about who fills the role of plan administrator for your plan, make it priority number one to figure it out.

Familiarize Yourself with the Role of the Administrator

As the day-to-day stock administrator, it’s your job to know which decisions need involvement from the plan-designated administrator. Oftentimes, this includes things like determination of fair market value, modifications to certain terms like termination provisions, even approval to extend equity in foreign locations. Make it your mission to become familiar with all of the areas where management alone may not have the true decision making power. It’s not uncommon for there to be misunderstandings about who is authorized to make decisions that affect the plan. For example, the board may task the CEO with overseeing the process of gathering stock grants for approval. The CEO may rely on the VP of Compensation for the legwork. When it comes to approvals, it may be blurry as to who is really authorized to approve the grants – the VP? The CEO? The board? As the stock administrator it’s vital to understand what authorization is needed relative to the various decisions associated with the plan. The absence of proper authorization by the plan designated administrator has been a key factor in litigation outcomes that have favored stock plan participants and cost employers millions of dollars. The Delaware case Fox v. CDX Holdings includes this very nuance.

Document All Decisions

Even when it’s clear who the plan administrator is, it’s important to take steps to document any decisions the administrator makes relative to the stock plan. For example, if the board is tasked to determine a fair market value, make sure it’s the board who does so and get that decision in writing.

If the plan allows for delegation of certain decision making powers, make sure the administrator of the plan has documented in writing their delegation of the responsibility and to whom. In my experience, it's common for information to initially be shared and disseminated in meetings and office conversations. If this is the format where information about plan administrator decisions or delegations come to your radar, be sure to follow this up with written documentation. 

Double Check

There are certain occasions where it would be prudent to build a “double check” of decision-making authority into the process. Mergers and acquisitions are a prime example of such situations. These transactions are infrequent and warrant another review of the plan to refresh on who is approved to make change-in-control related decisions.

Educate the Administrators

One of the stand out components in the Fox v. CDX Holdings case (there’s not enough space in this blog to review the case here, but more details are available in The NASPP Advisor newsletter article “Plan Administrator Defined” (January/February 2017 issue)) was that some of the members of the board – the plan administrators, were unaware that they were the administrators of the plan and the duties that comprise that role. I suspect that if a survey were to be done of plan defined administrators, there would be more than a handful that weren’t quite clear about their role. Even for those that are aware of their role, it seems like it can become a “set it and forget it” type of situation. Once the administrator is made aware of their designation as such, it may rarely (if ever) be discussed again. It seems wise take proactive steps to communicate to your plan’s administrator(s) about their responsibilities with some regularity, perhaps part of an annual message. Part of that education should include not just a reminder about the role, but details about the situations in which the plan will call on the administrator to make decisions. It’s possible that even well-aware administrators may become used to routine activities such as grant approvals, and transaction based fair market value definitions; yet remain unaware of the less common situations where their input will be necessary (change in control, modifications and anything else that ranks as less frequent in your plan).

Don’t Go It Alone

The plan is a contractual agreement and navigating the various decision needs that arise under the plan can be tedious and nuanced. Sometimes the plan defined administrator is tasked with “interpreting” various aspects of the plan, which can be subjective. It’s best to involve your legal resources anytime a situation arises that may require such interpretation or documentation of a decision. This is a team effort, and although the stock plan administrator should make it their business to monitor the plan requirements and plan administrator authorizations, it’s not a go-it-alone task.

-Jennifer
 

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