Tip of the Week: Use Inducement Grants to Protect an Equity Plan's Share Reserve
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Most publicly-traded issuers are interested in ideas that could help increase the life expectancy of the share reserve under its stockholder-approved equity incentive plan.  The purpose of this "Tip of the Week" is to discuss the use of "inducement grants" as one of the many ideas to consider.


If you look at an equity incentive plan's annual life cycle on a per-key employee basis, it is likely that the largest share grant occurred at the time the key employee was hired.  That conclusion makes sense because more shares are generally granted at the time of the key employee's hire in order to induce him or her to become employed with the issuer (compared to the number of shares it takes on an annual basis thereafter to retain that same key employee).  With this point in mind, issuers could increase the life expectancy of its equity incentive plan's share reserve if new hires received equity grants that were "outside" of the stockholder-approved equity incentive plan.

Inducement Grants

Under applicable NYSE and NASDAQ listing rules, stockholder approval is not required for "inducement grants."  The important concept here is that if an issuer complies with the inducement grant exception to the stockholder approval requirements, then that issuer could grant equity to new hires without drawing from the issuer's stockholder-approved equity incentive plan (i.e., thus preserving the life expectancy of such equity incentive plan).  To comply with the inducement grant exception, an issuer must:

  • Grant restricted stock or stock options as a "material inducement" to the person being hired as an employee (such includes equity awards to new employees in connection with an M&A transaction).  For this reason it is important to document in the employment agreement, offer letter or other transmittal letter that the equity grant was negotiated and was required by the key employee as a condition to his or her taking employment with the issuer.
  • Have the inducement grant approved by the Compensation Committee or a majority of the issuer's independent directors.
  • Promptly following the grant of an inducement award (generally within 4 business days), the issuer must disclose in a press release the material terms of the award, including the identity of the recipients and the number of shares involved.  Additionally, the issuer must make certain other filings with the applicable listing agency.

Noteworthy is that because inducement grants are "outside" of the stockholder-approved equity incentive plan, the shares subject to such grants will not be covered by the equity incentive plan's Form S-8 registration statement.

Thoughts to Consider if Implementing an Inducement Grant Program

  • Will the use of inducement grants with respect to new hires be used on a regular basis or on an ad hoc basis?  If the former, consider drafting an inducement plan document with form of award agreements.  And if the use of inducement grants will be on an ad hoc basis, then stand-alone inducement grants could be approved because the formality of a "plan" is not needed.
  • Consider filing a Form S-8 to register the shares subject to the inducement grant (i.e., every "offer" of a security must either be registered or subject to an exemption).
  • However, if the inducement grant consists of restricted stock and the use of this inducement grant exception is intended by the issuer as a one-time event (or infrequently), then consider whether the "bonus stock exemption" could be utilized in lieu of filing a Form S-8.  Under the "bonus stock exemption," restricted stock could be treated as if it were registered stock if certain conditions are satisfied.  See SEC Release No. 33-6188, SEC Release No. 33-6281 and a series of SEC no-action letters.  However, a drawback of the bonus stock exemption is that "affiliates" would be subject to Rule 144 resale restrictions (though the holding period should not apply because the shares are not deemed "restricted securities").
  • Partner

    Tony’s multi-disciplinary legal practice focuses on executive compensation, ESOPs and employee benefit arrangements (including their related tax, accounting, securities and corporate governance issues) in the United ...


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