New SEC Equity Compensation Plan Disclosure Rules


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


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.

Tabular Requirements

Pursuant to the new rules, a company must publish an Equity Compensation Plan Information Table setting forth the (a) number of securities to be issued under, and (b) weighted-average exercise price of, outstanding (compensatory) options, warrants and rights (note that outstanding restricted stock need not be disclosed in the table), and (c) additional shares available for future grants under all of the company’s equity compensation plans.  The disclosures may be aggregated across several plans, but non-stockholder approved plans must be disclosed as a separate category.  If more than one class of equity security is issued under its equity compensation plans, a company should aggregate plan information by type of security.  Disclosure is required whether the securities to be issued under a plan are authorized but unissued shares or reacquired treasury shares.  The form of required table is set forth below.

Plan Category

(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights

(b) Weighted-average exercise price of outstanding options, warrants and rights

(c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Equity compensation plans approved by security holders 

Equity compensation plans not approved by security holders 


If a company has individual compensation arrangements or if it has assumed equity compensation plans as part of a business combination, information regarding such arrangements or plans should be aggregated with similar information and must be provided in the table under one of the two appropriate disclosure categories.  Companies that assume individual compensation arrangements in a business combination should disclose the information called for in columns (a) and (b) in a footnote to the table.  To the extent that the number of securities remaining available for future issuance disclosed in column (c) includes securities available for issuance under any individual compensation arrangement or compensation plan other than upon the exercise of an option, warrant or right, a company should disclose the number of securities and type of plan separately for each such plan in a footnote to the table.  If the number of securities available for issuance under a company’s equity compensation plan is determined using a formula, a description of that formula must be disclosed in a footnote to the table.

New Textual Disclosure and Exhibit Requirements

In addition to the tabular disclosure, the SEC’s new rules also require more detailed textual disclosure of equity compensation plans that have not been submitted for stockholder approval.  The new rules state that each such plan must be identified and its material features must be described in a narrative form.  A company may satisfy this requirement by referring specifically to responsive disclosures in footnotes to the financial statements required in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as long as the cross-reference indicates the specific plan(s) that have not been approved by stockholders.  The added scrutiny of plans adopted without stockholder approval is also reflected in the new requirement that any plan in which any employee participates must be filed as an exhibit to Form 10-K or 10-KSB unless immaterial in amount or significance.  Prior to the new rules, the exhibit requirement only applied to arrangements with executive officers and plans in which directors and executive officers participated.

Further Information

If you have any questions regarding these new requirements or need advice regarding a specific situation, please contact your Haynes and Boone attorney or Lanny Boeing at 972.680.7553.

This Alert is a publication of Haynes and Boone, LLP and should not be construed as legal advice on any particular facts or circumstances.  This Alert is for general informational purposes only, and may not be quoted or referred to in any other documents or legal proceeding without our prior written consent.  The publication of this Alert is not intended to create an attorney-client relationship.

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