issues to consider when granting equity scholarships | Morgan Lewis – ML Benefits

Share-based awards are often an important part of a company’s compensation program. However, unlike more general benefit programs, which are generally only subject to federal law, share-based compensation agreements are, in most cases, subject to both federal laws (for example, the Securities Exchange Act of 1934, as amended (Exchange Act) and state laws. Individual state laws generally govern the formation and operation of private and public companies and other business entities organized in their state. The corporate governance provisions of these state laws generally govern certain aspects of executive compensation agreements, including who has the power to grant stock awards.

Generally, in the absence of a valid delegation, only the board of directors of a company can grant capital allocations. Giving an officer, usually the CEO, the power to grant assignments allows for the rapid granting of assignments in the context of new hires or the promotion, recognition or retention of employees, as it There is no need to wait until the next board or compensation committee meeting for the approval of individual grants. However, any delegation of authority must comply with the plan document and applicable law. The following summary is a high-level overview of some state legal requirements as well as best practices for delegating the authority to grant awards under share-based compensation plans.

The plan document must allow delegation

A board of directors or an applicable committee may only delegate grant-making authority to non-directors if the scheme under which the awards are granted allows such delegation. Any delegation must respect the limitations provided for in the plan. It is therefore important to review the plan and any underlying documentation to determine if delegation is permitted. Depending on the language of the plan, the board of directors may amend a plan to allow the delegation of the ability to grant awards under the plan, possibly without shareholder approval. The modification of the plan and the delegation of the granting authority can take place at the same meeting, but the plan must be modified before any delegation.

Restrictions applicable to beneficiaries of grants awarded by virtue of a delegation of authority

Awards granted under a delegated authority should not be made to officers of a public company (officers referred to in section 16), as the award of share awards by an officer, rather than by the board of directors, or a committee thereof, will not be exempt from the short-term profit rules of Section 16 of the Exchange Act. Under Section 16 (b) of the Exchange Act, if an officer, director or 10% shareholder (each, an insider) of a public company buys and sells, or sells and purchases, securities participation of the company within a period of less than six months, the insider must return to the company any short-term profit. However, there is an exemption when the transaction is approved in advance by the board of directors or a committee of independent directors. To ensure that rewards are exempt from the short-term profit recovery of Section 16 (b) under Rule 16b-3 of the Exchange Act, the authority to grant rewards to agents of the he section 16 should be kept by the board of directors or an independent committee of the board. In other words, the board can delegate the authority to grant awards to section 16 officers, but section 16 officers should not receive awards granted under a delegated authority.

The delegation must be authorized and in accordance with applicable state law

The delegation must also be authorized under applicable state law. For Delaware corporations, Delaware General Corporation Law (DGCL) Sections 152 and 157 (c) deal with the ability of the board of directors to delegate grant-making authority. Article 157 (c) of the DGCL allows boards of directors to confer on one or more directors the power, under a stock plan, to grant stock purchase rights and options to other employees, subject to certain conditions. The term “share rights” has generally been interpreted to include restricted share units. More recently, article 152 of the DGCL has been amended to allow boards of directors to delegate to executives the power to grant real shares, such as restricted shares, in essentially the same way that boards can delegate the power to issue options or rights under Article 157 (c) of the DGCL.

Under Delaware law, the scope of the agent’s delegated authority should be limited to:

  • designate the recipients of the awards; and or
  • determine the number of shares issued to each beneficiary.

Delegates generally cannot determine vesting requirements and other terms and conditions, which must be approved by the board or a committee thereof. Delaware law also requires that resolutions of the board of directors delegating the authority to approve stock awards specify the following:

  • The maximum number of shares that can be issued for the grants
  • The period during which the scholarships can be awarded
  • The minimum consideration that must be received for the shares


If state law and the terms of the equity plan permit, delegating grant-making authority to one or more officers can reduce the administrative time and burden of awarding equity awards. out of cycle. It is prudent to carefully monitor and document capital grants made by delegates to ensure compliance with delegated authority and state law. Boards should consider requiring that they receive regular reports on grants awarded under delegated authorities. The approval of a grant agreement form for this purpose is also important so that all award conditions are established.

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