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Staff Interpretation Letters
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All Years; Shareholder Approval; All
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Identification Number
1718
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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.
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Publication Date*:
10/30/2019
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Identification Number:
1718
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