Equity Plans Related to Section 162(m) (U.S.)
Background and Overview
Under a proposed ruling related to Section 162(m) of the Internal Revenue Code, recent IPO companies will need to obtain shareholder approval before awarding certain performance-based restricted stock units ("RSUs") to named executive officers in order to qualify them as performance-based compensation. Therefore, we anticipate an increase in such proposals from recent IPO companies.
ISS has generally recommended that investors support equity plan proposals solely for Section 162(m) compliance purposes, due to the favorable tax deduction on performance-based compensation for named executive officers that companies may receive. However, such support may not be warranted when equity plans contain shareholder unfriendly features, such as repricing provisions, evergreen share replenishments, liberal change in control definitions, etc. Therefore, such support may result in a more adverse and lasting impact on shareholders than a potential loss of tax deductions related to named executive officer grants.
Key Changes Under Consideration
ISS is proposing the following vote recommendation as a policy update:
Vote CASE-BY-CASE with respect to all IPO companies that seek shareholder approval of their equity plan proposals for the first time, to qualify for favorable tax treatment under the provisions of Section 162(m). A full equity plan analysis, including consideration of total shareholder value transfer, repricing, burn rate analysis (if applicable), and liberal change in control, will be conducted. Other factors such as pay for performance or problematic pay practices as related to Management Say on Pay may be considered, if appropriate.
Intent and Impact
While shareholders would benefit from the tax deduction that newly public companies wouldreceive under Section 162(m), they should have an opportunity to fully evaluate such companies' equity plan proposals. The proposed policy would allow shareholders to identify if any problematic features exist under the plan and whether such approval solely for Section 162(m) for the first time would be beneficial.
ISS anticipates continuing to support the vast majority of Section 162(m) proposals that do not seek additional shares. Most equity plans submitted for Section 162(m) approval contain shareholder friendly features, such as prohibition on repricing/option exchanges, fixed share requests, etc. Therefore, ISS anticipates that the proposed policy change would have minor impact.
Request for Comment
Please feel free to add any additional information or comments on the proposed policy change. In addition, ISS is specifically seeking feedback on the following:
- Should the potential tax deduction on performance-based compensation for named executive officers outweigh the adverse impact of problematic features in equity plans for 162(m) proposals from new IPO companies?
- If shareholders do not support the 162(m) proposal at the newly public company, the company would not be able to obtain tax deduction for performance-based compensation. Should the Compensation Committee be held accountable for the problematic design in the equity plan instead?
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