Report of session between the SEC staff and the ABA Joint Committee on Employee Benefits
By Cydney Posner
Today, Corporate Counsel posted the report on the technical question-and-answer session between the SEC staff and the ABA Joint Committee on Employee Benefits on May 6, 2008. The report was prepared by designated JCEB representatives, based on informal discussions between private sector representatives of the JCEB and SEC staff members and reflect unofficial, individual responses of the staff. The questions relate to the proxy rules, Form S-8, Reg S, Rule 701, Form 8-K, Section 16, Sections 12(g) exemptions for compensatory options and Rule 144. In a few cases, the questions stumped the staff and, in other cases, some of the answers have been updated or superseded by subsequent telephone interps. Many of the questions provide highly technical answers to technical questions (e.g., how to report various items of comp in the proxy tables), so you may want to consult the report if you have a tough question. There are only 27 questions and answers, but you may just be in luck.
Among the highlights:
Proxy Rules
Bonus Payable in Stock. There were several questions regarding the proper reporting of an incentive bonus opportunity that is initially denominated in cash (such as a percent of salary), but is subsequently paid in an equity form, in particular, whether the "bonus" would be reportable in the Non-Equity Incentive Plan column or in the Stock Awards column of the Summary Compensation Table, and how it would be reported in the Grant of Plan-Based Awards Table.
Where, at the time of establishing the bonus opportunity, the company determines that the amount of bonus earned will be determined as a dollar amount but converted into a form of equity, the awards are covered by FAS 123R and are therefore equity incentive plan awards. They should be reported as stock awards in the Summary Compensation Table and as equity incentive plan awards in the Grants of Plan-Based Awards Table. Although the Grants of Plan-Based Awards Table usually requires reporting a number of shares, where the potential bonus is stated in dollars, it would be permissible to change the column heading and report the potential payouts in dollars.
The trickier questions, to which the SEC could provide no answer at the time, related to situations where the company later decided to pay the cash incentive bonus in equity. In those cases, ABA representatives noted that conforming the proxy reporting to the accounting treatment was problematic because the accounting treatment is often unpredictable and may involve grant timing issues. For example, where a company has insufficient cash at year end and, as a result, decides to pay in equity, treating those awards as equity awards could create a disconnect because the equity award would typically be granted in the subsequent year.
A discretionary bonus payable in stock should be reported in the Stock Awards column of the Summary Compensation Table and reported as a stock grant in the Grants of Plan-Based Awards Table.
Form 8-K
Termination of Officer. Item 5.02(b) of Form 8-K requires disclosure if one of the specified principal officers or a named executive officer "retires, resigns, or is terminated from that position." Disclosure is not required for an executive officer’s change of title unless he or she is moving into or out of one of the specified "principal officer" positions or is being demoted to a non-executive officer position. For example, no Form 8-K is required when a Senior Vice President is promoted to Executive Vice President, but a filing would be required if the Chief Financial Officer was transferred to a non-CFO Executive Vice President position.
Disclosure of Option Grants. A compensation committee grants options to NEOs under an omnibus equity plan that allows broad discretion to the committee to make equity grants. The plan has been filed with the SEC, but the grant forms have not. Is an 8-K required? Under the old FAQs, the need to file a Form 8-K for an equity grant depended upon whether there was a previously filed form of option grant. However, this requirement is no longer part of the current staff interpretations. (I guess someone on the staff actually looked at a grant form and saw how little information they contain.) Instead, we are referred to Interps 117.09 –117.11, which deal with a cash plan, but should be used as an analogy with respect to an equity plan. In essence, these interps look at whether the award was materially consistent with the previously disclosed terms of the plan.
Appointment of Principal Officer. Item 5.02(c) of Form 8-K provides that when certain officers are appointed, the company must file an 8-K that, among other things, contains a description of "any material plan, contract, or arrangement" covering the officer that is entered into or materially amended in connection with his appointment, and "any grant or award" to such person in connection with such event. Accordingly, this Item would require disclosure of even a non-material, routine equity grant made to an individual at the time of his appointment to a "principal officer" position.
Rule 144
Treatment of Gifted Shares. An affiliate donor makes a gift of control stock to a non-affiliate donee. Under prior interps, a donee to whom an affiliate gave securities acquired in the open market could use Rule 144(k) for the resale of the securities, provided that at the time of resale they have been held for a combined period of two years by the donee and donor. The lack of a "sale" transaction between the donor and donee permitted the holding periods of each to be tacked and that concept still applies. However, an additional question was raised regarding the revised aggregation provision of Rule 144(e) that now applies to an affiliate-donor for up to six months after the date of the gift (in the case of a reporting company, one year in the case of a non-reporting company). The staff was asked how amended Rule 144 would apply to each of the affiliate donor and non-affiliate donee in situations where the non-affiliate donee is free to re-sell under Rule 144(b) but the six-month (or one-year) post-gift period for donor affiliate aggregation had not yet run. An ABA representative stated that, under prior Rule 144(k), the staff took the position that the donor did not have to aggregate his sales with those of the donee if the donee could freely resell the shares. However, the staff present did not seem to be familiar with that position and will have to give it further consideration, although the staff did state that the amendment was not intended to put donors in a worse position than under the old rules. Similar rules apply in the context of pledges of shares.
Presumptive Underwriter Doctrine. The staff confirms that the elimination of the presumptive underwriter doctrine under amended Rule 145 now extends to transactions exempt under 3(a)(10). But if the company is a shell company, the presumptive underwriter doctrine still applies.
Removal of Legends. In the case of a non-affiliate’s sale of restricted securities of a reporting company after the six-month holding period has run, but before expiration of the remaining six-month period during which the current informational requirements of Rule 144(c) continue to apply, Footnote 65 to the Adopting Release provides that the staff would not object to the removal of restrictive legends from shares held by non-affiliates after all applicable conditions in Rule 144 are satisfied. Rule 144(c) is one of those conditions.
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