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Form 4 Reporting for Performance Awards

April 18, 2019

Recently the following headline showed up in one of my Google alerts: “Nvidia’s Top Executives Forfeited Millions in Stock Bonuses Because Results Missed a Performance Goal.” It’s disappointing when performance awards are forfeited; having to report the forfeiture on a Form 4, and having the filing picked up by the media only adds insult to injury.

Moreover, in many cases, it is possible to avoid reporting the forfeiture simply by waiting to until vest to report the grant. Here is a run-down of how performance awards are reported on Form 4.

Performance-Based RSUs Reported at Vest

It feels a little counter-intuitive, but the SEC has indicated that performance awards in which vesting is contingent on anything other than stock price (including stock price targets in combination with other targets) are not considered granted until the performance conditions have been satisfied. Thus, the awards do not have to be reported until that time.

The Problem with Voluntary Reporting at Grant

Of course, there’s no penalty for reporting early, so it’s certainly permissible to report performance awards on a Form 4 at grant.  But there are a couple of challenges to doing so.

The first challenge is how many shares to report. If an award can pay out at anywhere from say, 25% of target to 200% of target, how many shares do you report as granted on the Form 4? One strategy is to report the target amount (if the award pays out above target, the additional shares earned would be reported at vest). Another strategy is to report the max payout. My preferred strategy, however, is to hold off reporting the award until it vests, and you know how many shares will be paid out.

It’s also not clear that voluntarily reporting the award at grant relieves the insider of the obligation to report the grant of the award at the time it is earned. While a forfeiture might not be reportable, if the award is earned, the insider might have to report the grant again. This is likely to be confusing to investors (and reporters).

Relative TSR ≠ Stock Price

We often equate TSR with stock price targets because the FASB views the two as equivalent. The SEC takes a different position, however. For Section 16 purposes, TSR is only considered to be equivalent to a stock price target if the TSR goal is absolute (not relative) and if the company either doesn’t pay dividends or pays only nominal dividends. Thus, even most TSR awards are reported as I’ve described above.

Of course, when vesting in an award is subject only to stock price targets, the award does have to be reported at grant.

What About Forfeitures?

Where an insider waits until the performance conditions are satisfied to report performance awards, it’s clear that it is not necessary to report the forfeiture. In that case, it’s as if the grant never existed.

Even where the award was reported at grant, it is not clear that the forfeiture is reportable. The mechanics of how a transaction is reported generally don’t change the substance of the transaction. Because performance awards aren’t considered granted until vested; when they don’t vest, they arguably weren’t ever granted and thus, the forfeiture would not be reportable, even if the grant has been reported already.

In addition, performance awards that are in the form of units are considered derivative securities (even if reported as an acquisition of common stock, as is permitted by the SEC when the award can be paid out only in stock). Cancellations of derivative securities for no value also aren’t reportable.

Thus where a performance award reported at grant is forfeited, the award could simply drop off the insider’s filings with no explanation (if the award was reported as an acquisition of common stock, however, the insider’s aggregate common stock holdings should be updated to reflect the forfeiture on the insider’s next filing).

- Barbara

  • Barbara Baksa
    By Barbara Baksa

    Executive Director