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February 18, 2025

Item 402(x)(1): What if You Don’t Grant Options or SARs?

Here’s something I shared in January on CompensationStandards.com:

Calendar year-end companies will soon be filing their first disclosures addressing new Item 402(x)(1), which requires a description of policies and practices related to the timing of option & SAR grants and the release of MNPI. Companies must address how the board decides when to grant (do they follow a predetermined schedule?), whether the board or compensation committee considers MNPI when deciding timing and terms of the options (and if so, how) and whether the company has timed the disclosure of MNPI to affect the value of executive compensation.

We know that the narrative policies and practices disclosure is required regardless of whether a company has actually made grants of option awards close in time to the release of MNPI, but one interpretive question we’ve heard pop up is what companies need to say — if anything — if they just don’t grant options or SARs at all. Gibson Dunn’s Ron Mueller addressed this in last week’s webcast, “The Latest: Your Upcoming Proxy Disclosures.” Here are a few takeaways from his talking points:

– Item 402(x) is not limited to NEOs. This requires disclosure about any option grant policy generally.

– Item 402(x) has no time limit. A lot of companies stopped granting options in the last few years — moving to performance-based awards — but they still have options outstanding. It’s unclear from Item 402(x) whether those companies need to address their policies and procedures under Item 402(x)(1).

– Item 402(x) does not address RSUs or PSUs. But some companies have written policies that apply not just to options, but also to grants of RSUs or PSUs. Many of these companies — including those that don’t grant options — have elected to discuss these equity grant policies and practices — going beyond what is required but providing helpful information. Per this Gibson Dunn alert, “although these rules apply only to options and similar awards, we expect many companies to include, or expand on existing, narrative disclosures regarding their policies and practices related to the timing of full value awards as well (i.e., restricted stock units, restricted stock, and performance stock units).”

This Troutman Pepper memo surveying early filers makes these points as well and addresses a few other topics in a Q&A format complete with sample disclosures. I especially appreciated this word of caution to not “oversell” what you do — and what you don’t do:

If, like most other issuers, you intend to write your Item 402(x)(1) narrative disclosure to describe your equity grant practices as following good governance standards, don’t oversell it. Issuers can often say (for example) that their compensation committee meetings are scheduled far in advance and generally occur after earnings are announced, and that they do not time the disclosure of MNPI for the purpose of affecting the value of executive compensation. But despite standard practices that reduce the likelihood that grants will be made when MNPI exists, such grants may nonetheless occur for a variety of reasons. For example, an issuer may consider it necessary or appropriate to grant equity to a newly hired senior executive immediately upon his or her start date. In such cases, issuers need to be able to show that the grants did not violate the practices they articulated. Moreover, to demonstrate responsible exercise of fiduciary duties in such cases, issuers may need to say that their compensation committees DID take the anticipated effects of the MNPI into account when sizing the grants.

– Meredith Ervine 

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