Over the past couple of years, the SEC has demonstrated an increased focus on grant practices, particularly spring-loaded equity awards. Given this focus, it would be prudent for companies to look closer at their equity grant practices and policies and, where they have not done so already, adopt policies providing for grants during “open windows” (i.e., following earnings releases).
New Disclosure Requirements
In connection with the SEC’s adoption of sweeping changes to the rules governing 10b5-1 plans and disclosure of the Company’s insider trading policies, the SEC also adopted new option grant disclosure requirements – Item 402(x) of Regulation S-K. The new rules mandate additional proxy statement disclosure to highlight practices that time option grants around the release of material non-public information (“MNPI”). The new disclosure requirements are twofold: (1) new narrative disclosure regarding option grant practices and timing and (2) detailed tabular disclosure of any options or similar instruments granted in the four business days before a periodic report (Form 10-K or 10-Q) is filed, or MNPI is reported on an 8-K (i.e., earnings releases). For each NEO (on an award-by-award basis), tabular disclosure must include the date of grant, number of shares underlying the award, exercise price, the grant date fair value, and percentage change in the market price of underlying shares between the closing market price on the trading day before and the trading day after the MNPI disclosure.
Calendar year companies must include this new disclosure in proxy statements filed in 2025 (the first proxy filed after the first full fiscal year beginning on or after April 1, 2023).
While less recent than the new disclosure rules, in November 2021, the SEC released accounting guidance (Staff Accounting Bulletin No. 120) that implicates all equity awards – not only stock options – granted close in time to the release of market-moving MNPI (“spring-loaded” equity awards). Under this guidance, when determining the accounting fair value of spring-loaded equity awards under ASC Topic 718, companies must consider the expected increase to share price and expected volatility in share price, in each case, following disclosure of the MNPI. The SEC did not provide specific guidance on the methodology companies should use to determine the appropriate valuation of spring-loaded awards and what would be considered a reasonable adjustment to valuation.
As noted above, this guidance goes beyond the historical focus on spring-loaded option grants in its broad application to any share-based awards. It would cover both non-routine grants and grants made in the ordinary course close in time to market-moving announcements.
Given the impending disclosure requirements around option grants and the more broadly applicable SEC accounting guidance, now is an opportune time to take a closer look at your company’s equity award grant practices. To the extent that companies do not yet have equity grant policies in place, companies should consider adopting a formal policy dictating the timing for annual ordinary course equity grants as well as limiting non-ordinary course grants to “open windows” to avoid triggering additional disclosure requirements and potential accounting implications and SEC scrutiny.