Changes to Delaware law increase flexibility for delegation of stock award authority

Good news, Delaware recently changed its General company law (DGCL) to make the delegation of authority with regard to the allocation of shares more flexible. The Amendments became effective August 1, 2022. The Amendments expand the elements of the grant of equity awards that a Board of Directors may delegate, including, and specifically, the authority to determine the terms and terms of the awards. If a board wishes to take advantage of the increased flexibility offered by the amended law, the board will likely need to review and modify its existing resolutions and policies regarding the power to grant awards under its stock ownership plans.

Previous law. Prior to the recently approved amendments, a board or a committee composed entirely of board members could delegate to an officer of the company the authority to grant stock options and other stock purchase rights, such as Restricted Stock Units (RSUs), within limited parameters. Specifically, the board was to set a limit on the number of shares that could be issued under awards granted under delegated authority and, more importantly, the executive could only have the power to specify the beneficiary and the number of shares subject to the allocation to be awarded. In other words, the delegate could not determine other terms and conditions of an award, such as the vesting schedule or any vesting acceleration event applicable to the award. Therefore, to enable the delegation of authority, the board should approve in advance the form of award agreement to be used, with the executive only being authorized to determine the type of award, the name of the beneficiary and the number of actions subject to the award. Executives had no authority to determine different vesting schedules or acceleration provisions to deal with special or one-time situations – only the board or a duly authorized committee of the board could approve these types of awards.

Amendments. Henceforth, a board of directors can delegate to a “person or body” the power to issue shares under article 152 of the DGCL and to grant rights or options to acquire shares under article 157 of the DGCL. To delegate this power, the Board or a duly authorized committee must pass a resolution establishing each of the following:

  • the maximum number of shares, rights or options that the delegate may issue (including the maximum number of shares that may be issued under the rights or options),
  • a period during which issues may take place (including the period for issuing shares upon the exercise of rights or options), and
  • the minimum amount of consideration (if any, in the case of a right or options) for which the shares, rights or options may be issued (and the minimum amount of consideration for the shares which may be issued upon exercise of right or options).

The minimum consideration amount may be based on a formula or other verifiable facts, such as the average trading price on a specific date or dates. No delegate would have the power to issue shares, options or rights for his benefit.

The amendments provide greater flexibility in two important ways.

  • First, whereas the power to grant under the previous law could only be delegated to an “officer” of the company, the amended law appears to allow this power to be delegated to any “person or entity” – suggesting that the authority to grant may be delegated to persons who are less experienced members of management.
  • Second, the amendments allow a delegate to be authorized to approve the terms and conditions of an award without board participation – not just the name of the award recipient and the number of shares subject to the award. attribution.

Benefits of the amended law. This new flexibility will be particularly useful in situations where a company needs to modify the terms of the standard award agreement form to accommodate special circumstances, such as a new hire bonus or retention bonus, or to change the terms of an award agreement. as part of a separation agreement, without having to call a board or committee meeting.

The benefits of the amended law extend beyond the typical stock incentive plan. For example, the board of directors can now delegate to management an increased level of administrative and decision-making authority for employee stock purchase plans – which generally apply to a large population of employees on a non-restricted basis. discretionary, thus involving fewer governance considerations.

Other Rules Limiting Delegation. While Delaware’s new law is helpful, public companies will still need to comply with Section 16 of the Securities Exchange Act of 1934, as amended, and stock exchange requirements. For example, the board of directors or a duly authorized committee of non-employee directors would still need to approve stock awards to Section 16 officers and non-employee directors.

Companies will also need to continue to observe appropriate governance controls and put in place appropriate protocols to address poor granting practices. For example, companies still need to consider whether their stock awards should be made at a time when the company is in possession of material, non-public information, particularly in light of SEC Accounting Guidelines regarding when a company is determined to have given “spring” rewards. Therefore, if a company wishes to take advantage of the amended law to delegate broader award authority to executives or other members of management, it will be essential to incorporate appropriate governance controls into award policies. shares and confirm that the compensation committee charter and other corporate governance documents allow for the delegation of authority in the desired manner.

Imposing required parameters. Finally, the amendments impose general parameters before the power to grant stock awards can be delegated to executives or other members of management. In light of these requirements, companies will need to review their share award policies and delegations of authority to determine whether they need to be updated to reflect these requirements – even if the companies do not intend take advantage of the greater flexibility offered by the amended law.

Take away food. Recent amendments to Delaware law are expected to promote more agile stock award practices by allowing the delegation of award authority to management, including the power to determine the terms of awards (within limits set by the board of directors). Delaware businesses will also need to consider any necessary revisions to existing delegations of authority to ensure compliance with the new required parameters.

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