Many companies that are taking their stock plans out for shareholder approval this proxy season to replenish their share reserve are also amending their plans to accommodate recent changes in law, governance practices and new developments, such as the recent change that FASB adopted to the accounting rules for share-based awards (ASC 718) allowing withholding of shares to satisfy tax withholding rates at a rate higher than the minimum tax withholding rate without triggering liability accounting.  However, Institutional Shareholder Services (ISS) has stated in their policies that amending a plan to allow share withholding at a higher tax withholding rate would be viewed negatively in certain circumstances.

Does this mean that a company submitting their stock plan for shareholder approval that amends the plan to eliminate a minimum share withholding requirement could run the risk of ISS electing to withhold a favorable recommendation on the stock plan proposal?

Considerations Surrounding Eliminating Minimum Share Withholding Requirements

Among the considerations that companies were forced to weigh in considering whether to amend their plans to eliminate these minimum share withholding requirements was whether the amendment would give rise to shareholder approval.  Prior guidance of the New York Stock Exchange (NYSE) and Nasdaq Stock Market (Nasdaq) was less than clear about whether such an amendment required shareholder approval.  However, the NYSE and Nasdaq have both since issued guidance stating that shareholder approval is not required to amend plans for this type of amendment.  Therefore, if a company was not planning on taking its stock plan out for shareholder approval because it did not need to replenish its share reserve (or for any other amendment required to be approved by shareholders), it could easily amend the plan without seeking shareholder approval.

In its FAQs regarding its 2017 policies on evaluating stock plan proposals, ISS stated that it viewed a plan amendment increasing the tax withholding rate in a plan that contained a liberal share recycling feature (e.g., a plan provision allowing the company to reissue pursuant to new awards shares withheld to satisfy tax withholding obligations) as negative because it would exacerbate concerns regarding diminished transparency of share usage inherent to liberal share recycling.  The FAQs go on to say that this concern would be mitigated if the plan stipulates that only the number of share withheld at the minimum statutory rate may be recycled, even if the tax withholding is at a higher rate.  But the FAQs did not state the practical consequences of including such an amendment as part of a stock plan proposal.

For instance, this type of amendment is not included among the plan features or grant practices ISS considers in determining whether to allocate points under their Equity Plan Scorecard (EPSC) for purposes of determining whether to make a favorable recommendation on a stock plan proposal.

However, could ISS decide to make a negative recommendation if this amendment was included as part of the stock plan proposal where there was a close call on whether the proposal had garnered a sufficient number of points under the EPSC?


If there is a possibility that ISS would give a stock plan proposal a thumbs down, it may be prudent for an issuer to delay amending its plan to eliminate a minimum share withholding requirement until after it has obtained shareholder approval (or implement this amendment before taking the plan for shareholder approval) given that such an amendment would not require shareholder approval under stock exchange rules.


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.