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NYSE Guidance on Equity Plan Amendments for Maximum Share Withholding
Tuesday, September 6, 2016

We previously described the summary of and concerns about the Accounting Standards Update that the Financial Accounting Standards Board recently issued relating to share-based compensation under US GAAP. The new rule will relax the current requirement that, to maintain favorable equity classification treatment for a share-based award, cash settlement of a share-based award for tax withholding purposes may not exceed an employer’s minimum statutory withholding requirement. The new rule will permit cash settlement of a share-based award for tax withholding up to the maximum statutory tax rate in the applicable jurisdiction.

The NYSE rules require shareholder approval of any “material revision” to an equity plan. A question arises as to whether an amendment to an equity plan to allow greater tax withholding or compensation committee discretion to authorize greater tax withholding would be a material amendment that required shareholder approval. In response to the new standards, the NYSE updated its Frequently Asked Questions on Equity Compensation Plans to clarify that an amendment to a plan to provide for the withholding of shares based on the participant’s maximum tax obligation (or compensation committee discretion to authorize such withholding), rather than the statutory minimum tax rate, is not a material amendment if the shares withheld were never issued. This applies even if the shares withheld are added back to the plan (i.e., the available shares are increased for later issuance under the plan) pursuant to the plan’s share add-back provisions.

The NYSE analysis warrants a brief comment. First, Nasdaq has a similar shareholder approval requirement and, to date, has not commented on this issue. As a result, relying on this rationale may pose some risk for companies traded on Nasdaq.

Second, the NYSE FAQ response provides an interesting analytic framework for addressing the shareholder approval issue for restricted stock grants. From the NYSE’s standpoint, a plan that calls for the add back of shares that have already been issued is, in essence, a “formula” plan (because it sets forth a formula for adding shares to the plan). As to share withholding for restricted stock grants that vest, we have confirmed with the NYSE that shareholder approval would be required to amend a plan to permit withholding at the higher rate (or to add compensation committee discretion to permit a person to do so) if the shares subject to the restricted stock grant are added back to the plan’s share reserve.

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