In welcome news, Delaware recently amended its General Corporation Law (DGCL) to increase flexibility for delegating share award granting authority. The amendments became effective on August 1, 2022. The changes expand the elements of granting share awards that a board of directors may delegate, including, and most notably, the authority to determine the terms and conditions of the awards. If a board of directors wants to take advantage of the increased flexibility provided by the amended law, the board will likely need to review and amend its existing resolutions and policies regarding the authority to grant awards under its share plans.
Prior Law. Prior to the recently approved amendments, a board or committee consisting solely of board members could delegate to an officer of the corporation the authority to grant stock options and other stock rights, such as restricted stock units (RSUs), within limited parameters. Specifically, the board had to set a limit on the number of shares that could be issued pursuant to awards granted under the delegated authority and, more importantly, the officer could only have the authority to specify the grantee and the number of shares subject to the award. In other words, the delegate could not determine any other terms and conditions of an award, such as the vesting schedule, or any vesting acceleration events applicable to the award. Therefore, to permit delegation of authority, the board would need to approve in advance the form of award agreement that had to be used, with the officer only permitted to determine the type of award, the name of the grantee and the number of shares subject to the award. Officers had no authority to determine different vesting schedules or acceleration provisions to address special or one-off situations – only the board or a duly authorized board committee could approve those types of awards.
Amendments. Now, a board may delegate to a “person or body” the authority to issue shares under DGCL Section 152 and grant rights or options to acquire shares under DGCL Section 157. To delegate such authority, the board or a duly authorized committee must adopt a resolution fixing each of the following:
- the maximum number of shares of stock, rights or options that the delegate may issue (including the maximum number of shares that may be issued pursuant to the rights or options),
- a time period during which the issuances may occur (including the time period for issuing shares upon exercise of the rights or options), and
- the minimum amount of consideration (if any, in the case of right or options) for which the shares, right or options may be issued (and the minimum amount of consideration for the shares issuable upon exercise of the right or options).
The minimum amount of consideration may be based upon a formula or other ascertainable facts, such as the average trading price on a specific date or dates. No delegate would have the power to issue shares, options or rights to themselves.
The amendments provide greater flexibility in two significant ways.
- First, while the granting authority under prior law could only be delegated to an “officer” of the company, the amended law appears to permit this authority to be delegated to any “person or body” – suggesting that the granting authority may be delegated to individuals who are less senior members of management.
- Second, the amendments make it possible to authorize a delegate to approve the terms and conditions of an award without board involvement – not just the name of the award recipient and number of shares subject to the award.
Benefits of Amended Law. This new flexibility will be particularly helpful in situations where a company needs to vary the terms of the standard form of award agreement to accommodate special circumstances, such as a new-hire grant or a retention award, or to amend the terms of an award agreement in connection with a separation arrangement, without having to convene a board or committee meeting.
The benefits of the amended law extend beyond the typical share incentive plan. For example, the board may now delegate to management an increased level of administrative and decision-making authority for employee stock purchase plans – which typically apply to a broad-based employee population on a non-discretionary basis, therefore implicating fewer governance considerations.
Other Rules Limiting Delegation. While the new Delaware law is helpful, public companies will still need to comply with Section 16 of the Securities Exchange Act of 1934, as amended, and stock exchange requirements. For example, the board or a duly authorized committee of non-employee directors will still need to approve share awards to Section 16 officers and non-employee directors..
Companies will also need to continue to observe proper governance controls and have appropriate protocols in place to curb poor granting practices. For instance, companies still need to consider whether their share awards should be made at a time when the company is in possession of material, non-public information, particularly in light of recently adopted SEC accounting guidance relating to when a company is determined to have granted “spring-loaded” awards. Therefore, if a company wants to take advantage of the amended law to delegate broader granting authority to officers or other members of management, it will be critical to incorporate appropriate governance controls into share award granting policies and to confirm that the compensation committee charter and other corporate governance documents permit the delegation of authority in the desired manner.
Imposition of Required Parameters. Finally, the amendments impose general parameters before share award granting authority may be delegated to officers or other members of management. In light of these requirements, companies will need to review their share award granting policies and delegations of authority to determine whether they need to be updated to reflect these requirements – even if companies don’t intend to take advantage of the greater flexibility afforded by the amended law.
Takeaways. The recent Delaware law amendments should promote more nimble stock award granting practices by allowing the delegation of granting authority to management, including authority to determine the terms of awards (within limits set by the board). Delaware companies will also need to consider any necessary revisions to existing delegations of authority to ensure compliance with the newly required parameters.