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Frequently Asked Questions
  Staff Interpretation Letter 2019-2
Identification Number 1718
This is in response to your correspondence asking if an amendment to a shareholder approved Equity Plan removing the annual limit on issuing certain awards to a single individual (the “Amendment”) would be considered a material amendment and, as a result, require shareholder approval under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”). The annual limits were initially included to comply with an exemption under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), for certain qualified performance-based compensation that was removed in the Tax Cuts and Jobs Act of 2017.

The Equity Plan is an equity compensation plan, which required shareholder approval under the Listing Rules and was approved by the shareholders. The Equity Plan provides for grants of a variety of stock-based awards including options, stock appreciation rights, restricted stock units, restricted stock and performance shares to officers, employees, and directors of the Company.

You stated that the Equity Plan establishes a maximum number of shares of common stock that can be issued under the Equity Plan. You further stated the Equity Plan imposes a maximum number of shares that may be granted in the form of stock options or stock appreciation rights to any one individual during any one calendar year period (the “Annual Limit”). Finally, the Equity Plan establishes a maximum number of shares of common stock underlying awards that may be granted to any one employee (the “Lifetime Individual Limit”).

Section 162(m) of the Code, generally, imposed a $1 million cap on a publicly-traded corporation's federal income tax deduction for compensation paid to certain “Covered Employees” as defined in the Code. However, the Code provided for a "qualified performance-based compensation" exception (the “QPBC Exception”), which exempted certain qualified performance-based compensation from the $1 million deduction limitation under Section 162(m) if specified requirements were satisfied. You stated that the Company included the Annual Limit in the Equity Plan to ensure that stock options granted under the Equity Plan to a Covered Employee would qualify for the QPBC Exception.

The Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017, eliminated the QPBC Exception under Section 162(m). As a result, you stated that there is no longer any legal rationale for the Equity Plan to include the Annual Limit and that the Company is therefore proposing the Amendment.

Following our review of the information provided, we have determined that the Amendment would not be a material amendment for purposes of the Rule. While the Amendment deletes the Annual Limit, there will be no increase to the maximum number of shares to be issued under the Equity Plan. As such, the Amendment may affect the timing of when certain awards could be made, but it will not increase the overall dilution possible under the Equity Plan. Furthermore, the Amendment does not result in any material increase in benefits to the participants because the Amendment does not change the Lifetime Individual Limit, or any material expansion in the class of participants eligible to participate in the Equity Plan. Finally, the Amendment does not result in any expansion in the types of awards provided under the Equity Plan.
 
Publication Date*: 10/30/2019 Mailto Link Identification Number: 1718
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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