Benefits of the Inducement Grant

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The purpose of this post is to remind issuers that inducement grants do not require shareholder approval, so if they are used correctly, they can help to increase the life expectancy of the equity plan's share reserve.

Inducement Grants

Shareholder approval of inducement grants to new hires is NOT required according to applicable NYSE and NASDAQ listing rules.  To qualify as an inducement grant:

  • The grant of equity must act as a material inducement to the person being hired as an employee (or such person being rehired following a bona fide period of interruption of employment); and
  • Promptly following the grant of an inducement award, the issuer must disclose in a press release the material terms of the award, including the identity of the recipients and the number of shares involved.

Since grants of equity are often larger in the context of hiring an executive officer, the use of inducement awards can help an issuer prolong the life of the share reserve under the equity incentive plan.  Thus, the "ask" to shareholders to increase the share reserve could happen less frequently.

Form of Award

Since inducement grants would be outside the equity incentive plan, the form of the award would typically be a stand-alone agreement.  However, an inducement "plan" could also be used, and is more common in M&A situations where the target's employees will be offered equity of the acquiror.

Registration Considerations

Inducement grants would not be covered by the equity plan's Form S-8, therefore, consideration must be given to whether registration of the underlying shares is desired.  If the inducement grant covers restricted stock, registration may not be required under the "bonus stock exemption" (certain restricted stock is treated as registered if certain conditions are satisfied).  See SEC Release No. 33-6188 and Release No. 33-6281, and a series of No-Action letters.  But even then, if the grant is to an "affiliate," registration is still likely desired so that the affiliate does not have to comply with Rule 144.

 

Topics:  Equity Plans, Executive Compensation, Inducement Grants, Nasdaq, NYSE, Officers, Registration, Shareholders

Published In: Business Organization Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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