United States: New SEC Disclosure Rules for Equity Compensation Plans

Written by Stuart Alperin, Neil Leff, Regina Olshan & Michael Lawson

On December 19, 2001, the Securities Exchange Commission (SEC) adopted new rules significantly increasing required disclosure of stock option and other equity based compensation plans.

The new rules require detailed disclosure on Form 10-K (or 10-KSB) and certain proxy and information statements of the number of options, warrants and rights, (including individual arrangements) outstanding under the registrant's equity compensation plans as of the last day of the most recently completed fiscal year. The number of securities remaining available for issuance under these plans must also be disclosed. The new rules require registrants to provide this information separately for any equity compensation plans that have not been approved by the registrant’s shareholders and to file with the SEC copies of any such plans unless "immaterial in amount or significance."

Registrants must comply with the new disclosure requirements for (i) annual reports on Form 10-K (or Form 10-KSB) for fiscal years ending on or after March 15, 2002 and (ii) proxy statements (or information statements) in connection with meetings of, or action by, security holders occurring on or after June 15, 2002, if the registrant is submitting a compensation plan for shareholder approval (even a cash-only plan). If this results in the information being required to be included in both filings, the registrant may satisfy its Form 10-K obligation by incorporating the required information by reference from its proxy statement, if that statement involves the election of directors and is filed not later than 120 days after the end of the fiscal year covered by the Form 10-K.

The new equity compensation table must include the following information (on an aggregated basis for each class of security) with respect to all equity compensation plans and arrangements in effect as of the end of the registrant’s last completed fiscal year, broken out based on whether the applicable plan had been approved by shareholders or not:

• the number of securities to be issued upon exercise of all outstanding options, warrants and rights;
• the weighted average exercise price of all outstanding options, warrants and rights; and
• the number of securities remaining available for future issuance under all of the plans and arrangements.

The disclosure must be in table format, as follows:

PLANS AND ARRANGEMENTS TO BE INCLUDED: The new rules require disclosure of all equity compensation plans or arrangements, including individual arrangements, that are in effect as of the end of the registrant’s last completed fiscal year and that provide for the award of the registrant’s securities or the grant of options, warrants or rights to purchase securities to any employee or non-employee (e.g., directors, consultants, advisors, vendors, customers, suppliers or lenders) of the registrant or its parent, subsidiary or affiliated companies.

No disclosure is required for plans, contracts or arrangements providing for the issuance of warrants or rights to all security holders on a pro rata basis (e.g., such as a stock rights offering) or for any employee benefit plan that is intended to be qualified under Section 401(a) of the Internal Revenue Code (e.g., such as a 401(k) savings plan).

Columns (a) and (b) of the table require disclosure of outstanding "options, warrants and rights."For purposes of columns (a) and (b), the term does not include restricted stock. We understand from recent discussions with the SEC that whether or not other types of equity based awards, such as phantom stock or stock appreciation rights, are to be included is an issue which has not been resolved and may be subject to future interpretive guidance. We are continuing to seek clarification from the SEC on this point. In addition, in informal discussions the SEC has informed us that it does not view rights to acquire stock under an employee stock purchase plan as "options, warrants or rights" and, accordingly, rights outstanding under employee stock purchase plans need not be included in the columns (a) and (b) of the table.

All plans and arrangements that provide for future issuance of equity securities must be included in column (c) of the table. To the extent that the number of securities remaining available for future issuance, as disclosed in column (c) of the table, includes securities available for future issuance under any compensation plan or individual compensation arrangement other than upon exercise of an option, warrant or right (for example, pursuant to an employee stock purchase plan or subject to future grants in the form of restricted or bonus stock), a description of each such plan or arrangement, together with the number of securities available thereunder, must be included in a footnote to the table, irrespective of whether such plan was previously approved by shareholders.

ASSUMED PLANS: Where equity compensation plans or arrangements are assumed in a corporate transaction (e.g., merger or other acquisition)¹:

If the registrant has both the ability and the intention to make grants or awards of its own equity securities under the assumed plans subsequent to the transaction (i.e., grants in addition to those made in respect of awards previously made by the acquired entity and converted in the transaction), the assumed plans must be included in the table (and may be aggregated with the existing plans and arrangements of the registrant). The plans would be reflected as "equity compensation plans not approved by security holders" unless the plans had been approved by the security holders of the registrant (the prior approval by the security holders of the acquired entity is not relevant).

If the registrant has no intention of making any grants or awards of its own equity securities under the assumed plans subsequent to the assumption, the assumed plans need not be included in the table. In this case, however, a footnote to the table must disclose, on an aggregated basis, the number of securities to be issued upon exercise of options, warrants and rights assumed in the transaction together with their weighted average exercise price.

PLANS BEING SUBMITTED FOR AMENDMENT: Where action is being taken to amend an existing equity compensation plan or arrangement, the table must include information about the securities previously authorized for issuance under such plan or arrangement but should not include the number of additional securities that are the subject to the amendment for which the registrant is seeking shareholder approval.

EVERGREEN FORMULA PLANS: If a plan contains an "evergreen" formula for calculating the number of securities available for issuance under the plan (e.g., percentage of outstanding shares), a description of the formula must be disclosed in a footnote to the table.

In addition to the disclosure in the table, registrants must summarize, in narrative form, the material terms of each equity compensation plan and arrangement that was established without shareholder approval. If financial statements provide such a summary, the registrant may incorporate the summary by cross-reference.

A registrant is required to file with the SEC, as an exhibit to Form 10-K or 10-Q for the applicable period, a copy of each plan or arrangement adopted without shareholder approval in which any employee participates (whether or not an executive officer) unless "immaterial in amount or significance". A compensation plan assumed by the registrant in connection with a corporate transaction pursuant to which the registrant may make further grants or awards of its equity securities is considered a compensation plan of the registrant for such filing purposes.

The new rules apply to all public reporting companies and all "small business" registrants that have reporting obligations under the Securities Exchange Act of 1934 and maintain or adopt an equity compensation plan. The new rules do not, however, apply to foreign registrants.

We are currently anticipating that the SEC will release additional interpretive guidance in the near future addressing some of the unresolved issues raised by these new disclosure rules, and we will keep you informed about any such new developments.