Corporate & Securities Blog

Equity-Based Compensation: Delegation of Grantmaking Authority

As we explained in a prior blog post – The Basics of Granting Equity-Based Compensation Awards – state laws governing corporate governance provisions typically apply to certain aspects of executive compensation arrangements, including, for example, who has the authority to grant equity awards. In 2022, Delaware amended Sections 152 and 157 of the Delaware General Corporation Law (DGCL) to expand the board of directors’ ability to delegate grantmaking authority with respect to stock rights and options. More recently, on May 16, 2023, and June 30, 2023, the Delaware State Senate and the Delaware State House, respectively, adopted further amendments, which are awaiting the Governor’s signature. If signed into law, the 2023 amendments would become effective on Aug. 1, 2023.

2022 DGCL Amendments
Under the amended DGCL § 152 and 157, the board may delegate to any person or body, regardless of whether the delegates are officers or board members, authority to approve issuances of stock, stock rights and stock options. The delegates will be able to determine the recipients of grants, the timing of grants, the exercise price, the number of stock options or rights to be granted, and other terms and conditions of the awards, including vesting and expiration.1

Board resolutions must be adopted, delegating such power to implement the new authority allowed by these amendments. The 2022 DGCL amendments provide that in order for the delegation to a non-board member or body to be proper, the board resolutions must specify the following:

  • The maximum number of stocks, stock rights or stock options that may be granted, and the maximum number of shares issuable upon exercise thereof.
  • A time period during which such stock, stock rights or stock options, and during which the shares issuable upon exercise thereof, may be issued.
  • A minimum amount of consideration (if any) for which such stock, stock rights or stock options may be issued, and a minimum amount of consideration for the shares issuable upon exercise thereof.2

Notwithstanding the limitations of DGCL § 152 and 157 with respect to non-board members and bodies, board committees remain empowered to exercise the full power and authority of the board to make grants of stock, stock rights and stock options.

2023 DGCL Amendments
The 2023 Amendments clarify that a corporation’s issuance of stock under Section 153 must meet the minimum consideration requirements (if any) as provided in DGCL § 153. DGCL § 153 was amended to confirm that the minimum consideration requirement (typically any par value) does not apply to the corporation’s disposition of treasury shares. The corporation may also receive cash, any tangible or intangible property, or any benefit to the corporation (or any combination of those) as consideration for treasury stock. DGCL § 157 was amended to (a) clarify that DGCL §157(c) is the exclusive means for the board to delegate authority (b) require the board resolution authorizing delegation to specify a separate time period for the issuance of shares on the exercise of the rights or options, (c) enable the board resolutions to delegate the power to fix the terms on which shares may be acquired from the corporation on the exercise of rights or options and (d) remove the requirement that the board resolution authorizing delegation specify the maximum number of rights or options that may be issued under the resolution. If signed into law by the Governor, these amendments would become effective Aug. 1, 2023.

Takeaways
As a practical matter, when deciding how much grantmaking authority to delegate to management, it is critical for the board to strike a balance between allowing the expanded flexibility provided by the recent DGCL amendments while ensuring the board retains sufficient control and oversight over the issuance of securities and awards that will dilute the ownership interests of the company’s stockholders.

If permitted by state law and the terms of the equity plan, the administrative challenges of granting off-cycle equity awards may be reduced by delegating grantmaking authority to one or more officers. The delegation of grantmaking authority could be especially helpful in instances where companies want to streamline hiring employees or hold on to valued ones without having to go through the time-consuming process of calling a board or committee meeting.

On the other hand, prior to the 2022 DGCL amendments, it was the practice in some privately held companies for a CEO (who was also a member of the board) to constitute a one-person board committee for purposes of making equity-based grants. Corporations may continue such practice of delegating the authority to make grants of equity awards to a one-person board committee. Note that the foregoing is more common where the CEO is the founder and still retains significant majority ownership. This is generally not the case in venture capital or private equity-backed companies where institutional investors want control over equity compensation for key employees.

As a matter of prudence, boards should consider requiring that delegates provide regular reports of grants made pursuant to delegated authority, as it is important to carefully track and document equity grants made by delegates to ensure compliance with delegated authority and state law, as well as being a matter of good housekeeping.

1 Under prior Delaware law, the scope of an officer’s delegated authority was limited to designating recipients of the awards and/or determining the number of shares issued to each recipient. Delegates generally could not determine vesting requirements or other terms and conditions, which were required to be approved by the board or a committee thereof.

2 The consideration paid for stock rights or options may be set by reference to a formula provided in the board resolution, such as by reference to the trading price of the company’s stock.


About the Authors

Katrina L. Berishaj

Katrina Berishaj advises financial services clients, including banks, trust companies, broker-dealers, investment advisers, insurance companies and institutional investors, on issues arising under the fiduciary and prohibited transaction rules of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, with respect to financial products, services and transactions.

kberishaj@stradley.com
202.507.5179

Zunara Ishtiaq

Zunara Ishtiaq is a member of the firm’s business department and focuses her practice on structuring secured and unsecured financings, including acquisition financings and asset-based and real estate loans for commercial banks, investment funds, and public and private companies.

zishtiaq@stradley.com
215.564.8664

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