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To Our Public Company Clients: The SEC has adopted new rules that generally require domestic public companies to publicly disclose information regarding the potential share “overhang” that exists as a result of all of their equity compensation plans. The new rules affect Regulation S-K and S-B Items 201 and 601, Items 10 and 14 of Schedules 14A and 14C, as well as Item 12 of Form 10-K and Item 11 of Form 10-KSB. These rules apply to annual reports for fiscal years ending on or after March 15, 2002, and to proxy statements relating to annual meetings that occur on or after June 15, 2002. The SEC release adopting these rules is Securities Act Release No. 33-8048 and it is available at www.sec.gov/rules/final/33-8048.htm. Background In adopting the new rules, the SEC noted the increasing number of public companies that use equity based compensation as a component of their compensation strategy. The SEC further noted both that the use of equity compensation was often resulting in significant shifts of stock ownership between existing stockholders and management and that the popularity of equity compensation was resulting in an escalation in the number of shares of common stock issued or reserved for issuance under equity compensation plans. In connection with adopting the new rules, the SEC highlighted three primary concerns regarding equity compensation: First, many companies implemented equity compensation plans without obtaining stockholder approval; Second, existing disclosure rules did not require a company to disclose in a single place the total number of securities remaining available for issuance under the company’s entire equity compensation program; and Third, stockholders did not have a reliable source by which to judge the potential dilutive effect of a company’s total equity compensation program. Scope of New Disclosure Requirements The new rules cover most, but not all, arrangements involving equity compensation to employees and non-employees including “directors, consultants, advisors, vendors, customers, suppliers or lenders.” The disclosure requirements cover broadly available plans that are available to large classes of employees and non-employees, and individual arrangements that are unique to a single person. Companies should note that plans, described as those “intended to meet the qualification requirements of Section 401(a) of the Internal Revenue Code,” are not subject to the new disclosure rules. For example, qualified pension plans such as a 401(k), qualified stock bonus plans and qualified profit sharing plans would be exempt from the disclosure requirements. The new rules require every domestic public company to publish at least annually a table that discloses specified information regarding equity compensation plans in effect as of the end of the company’s most recent fiscal year. The table must be included in the company’s proxy statement if the company is seeking stockholder approval of any compensation plan. If the company is not seeking stockholder approval of a compensation plan, the table must be included in either the company’s Form 10-K or 10-KSB or in the proxy statement for its annual meeting that is incorporated by reference into the Form 10-K or 10-KSB.

 

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