Who Can Approve Equity Grants? New Flexibility for Delaware Corporations
September 22, 2022
Delaware recently amended its general corporation law to expand the extent to which authority to approve equity awards can be delegated to individuals who are not directors. This blog summarizes the new law.
Who Cares About Delaware State Law?
Chances are, you do. State corporate laws stipulate which individuals or entities have authority over issuances of company securities, including equity awards. For this purpose, your company is subject to the laws of the state it is incorporated in. Most US corporations are incorporated in Delaware. If this is the case for your company, the amended laws apply to you.
A Short History Lesson on Equity Award Approval Requirements Under Delaware Law
Under all state laws, issuances of company securities (including stock, stock and unit awards, stock options, etc.) must be properly approved; a company’s board of directors has authority to approve such issuances. In most (possibly all) states, the board of directors can delegate this authority to a subcommittee of the board (and a subcommittee can consist of just one director).
In 2001, the state of Delaware went one step further and amended its corporate laws to allow the board to delegate authority to approve stock option and unit awards to officers (or committees of officers) who are not board members, subject to the following limitations:
- The officer or committee could approve only the employees to receive equity awards and the number of shares to be awarded.
- All other terms and conditions (e.g., price, vesting and forfeiture provisions) had to be determined by the board or a committee of the board.
- Officers could not approve grants to consultants or other nonemployees.
- The resolution delegating approval authority had to establish a maximum number of shares that the delegates could approve.
- Officers could not approve grants of equity awards to themselves.
In 2016, Delaware again amended its corporate laws to extend the above delegation authority to the issuance of stock (e.g., restricted stock). To keep everyone on their toes, the limits on this authority were slightly different than the limits on the authority to approve stock options and other rights.
Just as for stock options and other rights, only authority to determine who receives the awards and the number of shares issued to each award recipient could be delegated. Vesting requirements and other terms and provisions still had to be determined by the board and the resolution delegating approval authority had to establish a maximum number of shares that could be issued. But the resolution also had to specify the maximum time period over which the shares could be issued and the minimum consideration that must be received for the shares.
The 2022 Amendments
This year’s amendments standardize the delegation of authority requirements for all types of securities, ensuring a consistent set of limitations for all forms of equity awards, while also expanding both the individuals that authority can be delegated to and the scope of the authority that can be delegated. Effective August 1, 2022, under amended Sections 152 and 157 of the Delaware General Corporation Law:
- The board can delegate authority to approve issuances of company securities, both stock, including restricted stock, and derivative securities, such as employee stock option or unit awards, to any person or body (e.g., a committee). The delegate does not need to be an officer of the company or a board member.
- The delegate may be granted the authority to approve issuances of securities to any person or body, except that delegate may not approve issuances of securities to themselves. Previously, delegates could not be granted authority to approve the issuance of securities to nonemployees.
- The delegate may determine both the recipients of issued securities as well as the number of securities to be issued.
- The delegate may determine the terms under which the securities will be issued. Thus, delegates can establish vesting and other equity award conditions.
Some Limitations Still Apply
Under the amended Delaware law, any resolution delegating authority to approve issuances of company securities must specify the following:
- The maximum number of shares, options, units, or other rights that may be issued pursuant to the resolution.
- The time period over which the securities may be issued.
- The minimum amount of consideration to be paid for the securities.
- For options and similar rights, the minimum consideration to be paid for any shares acquired upon exercise.
Plan Must Allow Delegation
Before your board delegates authority to approve equity awards, the plan under which the awards are granted must allow this. It is likely that your plan currently allows authority to approve grants to be delegated only to board members or possibly to officers. Even plans that allow granting authority to be delegated to officers, likely require the terms and conditions of the grants to adhere to those pre-approved by the board or compensation committee.
Luckily, plans can always be amended, oftentimes without shareholder approval. It should be possible to amend the plan to expand the delegation of authority provision with board action alone. The board could (A) amend the plan to allow this delegation of authority and (B) vote to delegate authority under the amended plan at the same meeting; but to be safe, make sure they do it in that order.
Consider a Grant Approval Committee
Currently, at most companies where authority to approve grants has been delegated to in-house personnel, the delegate is most commonly the CEO. This is likely because the CEO is usually a member of the board and thus, pre-amendment, could be delegated more authority than an officer who was not a board member.
With the flexibility provided under the amended code, companies may want to consider whether the CEO is the best person to approve equity grants. I personally like the idea of establishing a committee of in-house personnel to approve grants, perhaps even a cross-departmental committee consisting of high-ranking personnel from HR, accounting/finance, and legal.
Using a committee to approve grants could help avoid improprieties in the selection of grant recipients, such as the situation that happened at McDonald’s a few years ago. As covered in “Across Our Desk” in the Fall 2020 issue of the NASPP Advisor, a now former CEO of McDonald’s, who had authority to approve grants, issued a award to an employee that he had an inappropriate sexual relationship with.
When more authority is granted to delegates, the potential for improprieties increases. Although establishing an approval committee isn’t a foolproof solution, it builds additional controls into the approval process that can help mitigate this risk.
Don’t Forget About Rule 16b-3
The change in Delaware law doesn’t affect Rule 16b-3, which companies rely on to exempt grants of equity awards to Section 16 officers and directors from the short-swing profits recovery provisions of Section 16(b). Companies typically achieve exemption under Rule 16b-3 by ensuring that the grants are approved by a committee of two or more nonemployee directors.
Most companies will want to keep this approval process in place for grants to Section 16 insiders. Where this is the case, the delegation of authority should be limited to grants issued to non-Section 16 insiders.
Wilson Sonsini has published a client alert that does a great job explaining the intricacies of the amended law and covers a number of practical considerations. The authors caution that, while the new flexibility may be welcomed by some companies, not all companies will want to take advantage of it.
Where companies want to delegate authority to approve grants to management, the authors present a list of important questions to consider, including the following:
- How often will the board or compensation committee review and renew the delegation of authority?
- For which employees (e.g., worldwide or only certain localities) and purposes (e.g., new hire, merit, spot awards) will management be authorized to approve grants?
- In addition to imposing a limit on the aggregate number of shares management can approve for issuance under awards, should limits be established over the size of individual awards?
- How often will grants be approved? On an ad hoc basis or on a set schedule? Can grants be approved during closed trading windows?
The timing of grant approvals could be of particular importance in light of the SEC’s recent guidance on spring-loading. Grants that are approved in advance of announcements of material information could be costly for the company, as explained in the feature article in the Winter 2022 issue of the NASPP Advisor. Establishing a regular cadence for grant approvals can help mitigate this risk.
Finally, I would be remiss if I didn’t mention pay equity considerations. Whether the board or management is approving grants, processes should be in place to ensure that decisions are made fairly and are reviewed regularly for patterns that might indicate unconscious bias. If updating your grant approval process to take advantage of the new flexibility afforded under Delaware’s laws, make sure to preserve any controls that exist for this purpose and evaluate whether additional controls are necessary.