Rule 303A.08 of the NYSE Listed Company Manual requires that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions to such plans, with limited exceptions specified in the Rule. The NYSE issued clarifications to certain FAQs on the Rule on August 18, 2016, which are summarized in the following memo.

No de minimis exception.

Rule 303A.08 does not exempt plans providing for de minimis issuances of shares to non-officer employees. If shares of the company are issued to employees, shareholder approval is required unless there are other applicable exemptions. Question A-2.

Certain spinoff adjustments to options are not considered a repricing or a material revision subject to shareholder approval.

The spinoff by a parent company of a subsidiary typically involves adjustments to the parent company’s outstanding stock options that might be considered to be a repricing or a plan amendment requiring shareholder approval. Many equity compensation plans prohibit repricing of stock options without shareholder approval. In addition, under NYSE Rule 303A.08, if a plan does not contain a provision that specifically permits repricing of options, the plan will be considered as prohibiting repricing. Accordingly any actual repricing of options will be considered a material revision of a plan that requires shareholder approval, even if the plan itself is not revised.

The FAQs clarify that certain types of spinoff adjustments to options are not considered a repricing or a material revision subject to shareholder approval. Adjustments “done in a manner designed to ensure that the difference between the aggregate fair market value of the shares subject to the options and the aggregate exercise price of the options (whether positive or negative), as well as the ratio of the per-share fair market value of the shares to the per-share exercise price of the options, remain the same” after the spinoff would not be considered a repricing or a material revision of the options, and thus would not be subject to the shareholder approval requirement.

Adjustments exempt from the shareholder approval requirement include anti-dilution adjustments made to parent company options that survive the spinoff, parent company options that are converted into options to acquire subsidiary stock, and parent company options that are adjusted to consist of two options, one to acquire parent company stock and one to acquire subsidiary stock. In each case, the number of shares subject to the options would be based on the trading price of parent company stock immediately before giving effect to the spinoff and the trading prices of parent company and subsidiary stock immediately after giving effect to the spinoff. Question B-13.

Adding back unissued shares to a plan is not a “formula” subject to shareholder approval.  

Rule 303A.08 provides that if a plan contains a formula for automatic increases in the shares available (sometimes called an “evergreen formula”) or for automatic grants pursuant to a formula, each such increase or grant will be considered a revision requiring shareholder approval unless the plan has a term of not more than ten years.

The FAQ specifies that adding back shares that have never in fact been issued is not considered a “formula” requiring shareholder approval. Examples include adding back shares that are subject to an expired or forfeited option, or adding back shares that are held back upon exercise of an option to cover the exercise price or to satisfy income tax obligations.

On the other hand, adding back shares that have actually been issued is generally considered a “formula” requiring shareholder approval. Examples include adding back shares that a grantee already owns that are tendered to pay the option exercise price or to satisfy a tax obligation, or adding back shares that are repurchased by the company using cash paid on exercise of options. In addition, adding back shares of restricted stock that are forfeited is not a formula, even though technically, the restricted stock was issued upon grant.

If a plan has a fixed number of shares available, but includes one or more formula addback rules that do not apply to the fixed share pool, the formula addback rules may be treated as separate from the fixed share pool for purposes of the NYSE rules. Thus, the term during which the formula addback rules are operative must be limited to 10 years from the last shareholder approval of the plan, but that term need not be applied to the fixed share pool itself. Question C-1.

Grants may be made, but shares may not be issued, before shareholder approval of a plan.

Grants of awards may be made before shareholders approve a plan, but shares may not be issued under those awards until shareholder approval is obtained. For example, a company may grant options that would not become exercisable until after shareholders approve the plan, but the company may not grant restricted stock, which is issued upon grant, before shareholders approve the plan. However, a company may promise to issue restricted stock at a future date, subject to obtaining such approval. Question E-2.    

Those companies seeking to adopt or issue shares under equity compensation plans should keep the NYSE’s clarified guidance in mind. The clarifications also serve as a good reminder to review practices on adding back (recycling) shares for future grants, in order to ensure that share usage policies are sound and meet shareholder expectations.