Issues to Consider When Officers Grant Equity Awards

Morgan Lewis - ML Benefits

Morgan Lewis - ML Benefits

Equity-based awards are often a significant element of a company’s compensation program. However, unlike more broad-based employee benefit programs, which are generally only subject to federal laws, equity-based compensation arrangements are, in most cases, subject to both federal (for example, the Securities Exchange Act of 1934, as amended (Exchange Act)) and state laws. Individual state laws generally govern the formation and operation of both private and public corporations and other business entities that are organized in their state. The corporate governance provisions of such state laws typically govern certain aspects of executive compensation arrangements including who has the authority to grant equity awards.

Generally, absent a valid delegation, only the board of directors of a company may grant equity awards. Providing an officer, typically the CEO, with the authority to grant awards allows grants to be made quickly in connection with new hires or employee promotion, recognition, or retention, as there is no need to wait until the next board or compensation committee meeting for approval of individual grants. However, any delegation of authority must comply with the plan document and applicable law. The following summary is a high-level overview of certain state law requirements as well as best practices for delegating authority to grant awards under equity-based compensation plans.

Plan Document Must Permit Delegation

A board of directors or applicable committee may only delegate grant-making authority to non-directors if the plan under which the awards are granted permits such delegation. Any delegation must comply with any limitations set forth in the plan. It is important, therefore, to review the plan and any underlying documentation to determine whether delegation is authorized. Depending on the language of the plan, the board of directors may amend a plan to allow delegation of the ability to grant awards under the plan, likely without shareholder approval. Amendment of the plan and delegation of grant-making authority can occur at the same meeting, but the plan must be amended prior to any delegation.

Limitations on Recipients of Grants Made Pursuant to Delegated Authority

Awards granted pursuant to delegated authority should not be made to executive officers of a public company (Section 16 Officers), because the grant of equity awards by an officer, rather than the board of directors or a committee thereof, will not be exempt from the short-swing profit rules of Section 16 of the Exchange Act. Under Section 16(b) of the Exchange Act, if a Section 16 Officer, director, or 10% shareholder (each, an Insider) of a public company buys and sells, or sells and buys, equity securities of the company within a period of less than six months, the Insider must disgorge any short-swing profits to the company. However, there is an exemption where the transaction is approved in advance by the board of directors or a committee of independent directors. To ensure that awards are exempt from Section 16(b) short-swing profit recovery under Exchange Act Rule 16b-3, the authority to grant awards to Section 16 Officers must be retained by the board of directors or an independent committee of the board. In other words, the board may delegate to Section 16 Officers the authority to grant awards, but Section 16 Officers should not receive awards granted pursuant to delegated authority.

Delegation Must Be Permissible and Compliant with Governing State Law

Delegation must also be permissible under the applicable governing state law. For Delaware corporations, Sections 152 and 157(c) of the Delaware General Corporation Law (DGCL) address the board of directors’ ability to delegate grant-making authority. DGCL Section 157(c) permits boards to confer upon one or more officers the authority under an equity plan to grant stock rights and options to other employees, subject to certain conditions. The term “stock rights” has been generally interpreted to include restricted stock units. More recently, DGCL Section 152 was amended to allow boards to delegate to officers the authority to award actual shares of stock, such as restricted stock, on essentially the same basis as boards may delegate the authority to issue options or rights under Section 157(c) of the DGCL.

Under Delaware law, the scope of the officer’s delegated authority must be limited to:

  • designating recipients of the awards; and/or
  • determining the number of shares issued to each recipient.

Delegates generally may not determine vesting requirements and other terms and conditions, which must be approved by the board or a committee thereof. Delaware law also requires that board resolutions delegating authority to approve equity awards specify the following:

  • The maximum number of shares that can be issued pursuant to the awards
  • The period during which the awards can be granted
  • The minimum consideration that must be received for the shares


If permitted by state law and equity plan terms, delegating grant-making authority to one or more officers may reduce the administrative delay and burden of granting off-cycle equity awards. It is prudent to carefully track and document equity grants made by delegates to ensure compliance with delegated authority and state law. Boards should consider requiring that they receive regular reports of grants made pursuant to delegated authority. Approving a form of grant agreement for this purpose is also important so that all award terms and conditions are established.

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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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