Quick Take: Omnibus Equity Incentive Plans

The FKBR Quick-Takes series explores trending legal topics to provide quick answers to common questions. In this edition, our Corporate & Securities team delves into key questions to illuminate the benefits of “Omnibus Equity Incentive Plans.”

Overview

An Omnibus Equity Incentive Plan (the “Plan”) is a comprehensive compensation strategy often adopted by companies to attract, incentivize, reward, and retain key talent. As opposed to narrowly focused plans, this Plan offers a variety of equity-based awards. The Plan is typically administered by a designated committee, often a Compensation Committee, while the board of directors (the “Board”) plays an oversight role in the Plan’s administration. In the absence of a Compensation Committee, the Board administers the Plan.

Quick Takes

1. What type of awards are commonly included in an Omnibus Equity Incentive Plan?

The awards vary based on the company’s mission, objectives, and preferences. Some common Plan awards are:

• Stock Options (which include Incentive Stock Options and Nonqualified Stock Options);

• Restricted Stock Units;

• Stock Appreciation Rights; and

• Deferred Stock.

With this comprehensive range of awards, it is important to ensure that the Plan is well drafted to provide clarity on the terms of the respective awards (vesting, termination, forfeiture etc.) and to facilitate administration.

2. Who is eligible to participate in the Plan?

Participation is often extended to a broad spectrum of individuals within a company, encompassing employees, executives, directors, and, in some cases, consultants or service providers. The eligibility criteria are usually outlined in the Plan, specifying the classes of participants and any specific conditions they must meet to participate. Where a company plans to rely on the exemption in Rule 701 of the Securities Act of 1933 (“Rule 701”), the intended recipients need to be one of the persons covered by the rule. 1 Rule 701 exempts securities awarded by private companies under a compensatory benefit plan from registration with the Securities and Exchange Commission (the “SEC”).

3. How do the Plan and the issuance of the underlying securities play out in terms of registration with the SEC?

For compensatory benefit plans, companies typically rely on exemptions from registration accorded by U.S. securities laws. For instance, the Rule 701 exemption often saves private companies the expense of registering these securities with the SEC. To rely on this rule, a company needs to comply with the stated requirements. Companies may also rely on other exemptions under securities laws, like the private placement exemption. The residence of the participants is an important point in determining whether a company is eligible for an exemption under the relevant state securities laws, often referred to as blue sky laws. We include a blue-sky memo (which analyzes this compliance requirement) when preparing Plans for our clients.

4. What documents typically accompany the Plan?

Documents which may accompany the Plan are:

i. A notice of grant which awards the incentive to the participant;

ii. An agreement between the company and the participant depending on the type of incentive awarded e.g., a restricted stock agreement, incentive stock option agreement, etc.;

iii. A notice of exercise to be used by the participant when exercising stock option awards; and

iv. An investment representation statement which ensures that the participant understands the nature of the securities received and their corresponding obligations under the securities laws particularly with respect to resale of the securities.

5. Finally, why do companies opt for Omnibus Equity Incentive Plans?

There are many reasons for a company, private or public, to adopt an Omnibus Equity Incentive Plan, including:

i. Flexibility. The Plan permits the issuance of various awards which allows a company to tailor incentives to a diverse workforce.

ii. Administrative efficiency. The Plan consolidates multiple equity compensation programs into a single cohesive framework thereby facilitating administration.

iii. The term of the Plan. A Plan typically lasts for a long time, usually ten years, and saves the company the expense of creating new equity incentive plans.

iv. Tax advantaged compensation. Participants who receive certain awards may be able to enjoy tax advantages (subject to compliance with legal requirements) not available without a qualified Plan.

v. Recruiting and retention of directors and key employees. The availability of a comprehensive equity incentive plan can enhance a company’s ability to attract, incentivize, and retain top talent.

While the importance of good drafting and proper plan administration cannot be overemphasized, the benefits of a Plan vastly outweigh its cost.

Our responses above are intended for general information purposes and should not be construed as legal advice. If you have questions or would like more insights on the topic discussed in this edition, please contact any of the following members of our Corporate & Securities team:

• Lynne Bolduc, Partner (lbolduc@fkbrlegal.com)

• Josephine Rachelle Aranda, Senior Associate (jaranda@fkbrlegal.com)

• Ikechukwu Ubaka, Associate (iubaka@fkbrlegal.com)