Among the recently enacted changes to the Delaware General Corporation Law (DGCL) that were described in our August 1, 2022 Client Alert are some that provide more flexibility for boards of directors of Delaware corporations to delegate to management the authority to grant equity awards (for this article, this will be referred to as a management equity grant committee). These changes, which were effective August 1, 2022, make it possible for a management equity grant committee to make more decisions regarding the structure of equity awards granted by the management equity grant committee. Before approving any delegation to a management equity grant committee, boards should carefully consider the corporate governance implications of such a delegation; as a reminder, many issues related to the backdating of stock options 10 or more years ago involved situations where a delegate was making the stock option grants, rather than the board or a committee of the board.

Background. A fundamental duty of the board of a Delaware corporation is to approve the issuance of capital stock of the corporation, including the creation and issuance of rights or options to acquire shares of capital stock. Such issuances are subject to both fiduciary considerations and the technical requirements of the Delaware statutes, which include who (or what corporate body) is permitted to authorize the issuance of capital stock, or rights or options to acquire capital stock and consideration required to be paid to the corporation for those issuances. In addition to the statutory requirements set forth below, a corporation should consider any additional requirements that may be imposed by the corporation's certificate of incorporation and bylaws, together with other agreements to which the corporation is a party.

Pre-Amendment. Prior to the August 1, 2022, amendments, boards were permitted to authorize the issuance of stock (DGCL 152) and separately permitted to grant "rights and options respecting stock" (DGCL 157). Additionally, Section 141(c)(2) of the DGCL states clearly that a duly authorized committee of the board (e.g., the compensation committee) may take any action with respect to the issuance of stock that the board is allowed to take. Rights and options respecting stock include equity compensation instruments like restricted stock units, stock options, and stock appreciation rights. The limitations on boards and committees of the board regarding such issuances and grants generally are limited to 1) statutory provisions that the consideration received by the corporation must be at least equal to the stock's par value (if any) and 2) any limitations included in the corporation's certificate of incorporation. Additionally, DGCL Section 161 provides that the corporation must have sufficient "headroom" (i.e., enough shares of capital stock not already issued, subscribed for or otherwise committed to be issued) to issue the shares, and that the corporation must receive fair value for the shares to ensure that the capital stock is validly issued, fully paid, and nonassessable.

DGCL Section 157(c) permitted the board to delegate to one or more officers of the corporation the authority to grant rights and options respecting stock to officers and employees of the corporation (other than to those to whom this authority had been delegated). This authority was limited in significant respects so the management equity grant committee could only 1) select officers or employees of the corporation or any of its subsidiaries to receive rights or options created by the corporation and 2) determine the number of rights or options to be received. At the time of the delegation, the board had to specify the maximum number of shares, rights, or options that the management equity grant committee could award. This limited authority meant that the management equity grant committee was not allowed, inter alia, to a) make grants to contractors or consultants, b) determine the terms of the grants (e.g., customized vesting schedules), or c) alter the forms of award used to document the grant (referred to in DGCL 157(a) as an "instrument" that must be approved by the board itself or a duly authorized committee of the board). The net result was that, to ensure validity, board or committee resolutions delegating authority to a management equity grant committee had to detail any possible alternative type of grant (e.g., designating a form and terms for new hire awards; potentially designating different forms and terms for different jurisdictions where grant recipients reside; designating forms and terms for annual focal awards and promotion awards) or anything that could be considered a "corner case" needed to be approved by the board or a duly authorized committee of the board.

Effective August 1, 2022. The changes to the Delaware statutes make the processes for issuances of stock, rights, and options more uniform and allow the board to delegate to a person or body (e.g., the management equity grant committee) the authority to grant stock, rights, or options on terms approved by resolution of the management equity grant committee as long as the board establishes 1) the maximum number of rights, options, or stock (including the maximum number of shares issuable on the exercise of rights or options) that the management equity grant committee can grant, 2) the time period during which the delegation is effective and when the rights, options, or stock (including any stock issued pursuant to the exercise of rights or options) can be issued, and 3) the minimum consideration payable for the rights, options, or stock (including any stock issued pursuant to the exercise of rights or options). The key changes that permit additional flexibility following the amendment are that:

• membership of the management equity grant committee is no longer limited to officers of the corporation,
• the management equity grant committee may make grants to non-employees, and
• the management equity grant committee may determine bespoke and varied vesting schedules or other terms for awards.

Practical Considerations for Equity Issuances. When deciding what authority to delegate to a management equity grant committee, if any, there is a natural tension between permitting the maximum flexibility allowed by statute and ensuring the board has close oversight over the issuance of equity awards that will dilute stockholders. The following are some of the matters that boards consider when determining whether to permit this sort of delegation:

1. The level of comfort that the board has with giving up control over dilutive issuances of stock. Some boards are comfortable giving complete flexibility if the management equity grant committee does not exceed an equity grant budget established at the beginning of the year, but others prefer more granular oversight and do not want to delegate any authority.
2. The board's level of comfort with internal controls and the ability of management to properly carry out its delegated authority.
3. The hiring pace of the corporation (a fast hiring pace might result in the board and management wanting to push down ordinary course new hire grants to management to ensure employees' equity awards are being promptly granted and communicated to them).
4. Whether the corporation is public or private. For private companies granting stock options, the body granting the options generally needs to ensure that the exercise price of the options is no less than fair market value on the date of grant. Many boards prefer that they be the only party that approves valuation of the corporation's stock, or at least that the board has an opportunity to consider and discuss whether any previous determinations of fair market value remain valid as of any future option grant dates. Public companies generally must also grant options with an exercise price at least equal to the fair market value of the stock on the date of grant, but because the corporation's stock is publicly traded, this is easier to manage because the board can be prescriptive as to how to determine the fair market value on the date of grant, for instance, by specifying that the closing price on the grant date will be the exercise price.

Not every corporation will choose to delegate the authority to management to grant equity awards, but those that do should carefully consider:

1. Committee composition: Who is on the management equity grant committee? Is every management equity grant committee member required to approve a grant or could a lesser number of members act?
2. What total number of shares and awards will the management equity grant committee be permitted to grant? The statute requires a total cap and an expiration date for the committee's authority, but the board or compensation committee may want to curtail this authority to allow only a lower limit in a shorter period (e.g., the total authority could be 5,000,000 shares in 10 years, with an additional limit of no more than 1,000,000 shares in any one calendar year).
3. Which groups may receive grants under this delegated authority? New hire, focal grants, only some geographies, only employees?
4. Should the quantity of shares that can be granted to a single individual be limited and/or be within ranges by level or position previously approved by the board or compensation committee? If the ranges are in dollar values, a methodology for converting dollar values to number of shares should be specified.
5. How should the exercise price for options be determined?
6. How frequently will the management equity grant committee make grants? Will it always be scheduled (e.g., first day of month) or is it permitted to make ad hoc grants? Will there be rules regarding grant dates or can the management equity grant committee choose the grant date it wants (so long as the grant date is not retroactive)? Will there be limits on the management equity grant committee acting during blackout periods?
7. How often will the board and/or compensation committee review and renew the authority delegated to a management equity grant committee?
8. If the management equity grant committee is not limited in the vesting schedules or types of awards it is permitted to grant, what process will be in place to ensure that any changes from the corporation's standard practices do not result in negative legal, accounting, or tax consequences?