Last week, the Council of Institutional Investors (CII) announced that its members had approved a change to its corporate governance best practices “designed to add momentum to the growing trend among U.S. companies to end automatic full vesting” of unvested equity in change-in-control and merger situations and increase the disclosure of the rationale for situations where accelerated vesting is used. Specifically, CII, which represents state pension funds, large institutional investors, and corporations with employee pension funds, adopted a policy that states automatic vesting in a change-in-control should not be permitted, but a company's board may be given discretion to "permit full, partial, or no accelerated vesting of equity awards not yet awarded, paid, or vested." The policy states that “adjustments may be appropriate to account for the actual performance delivered or the proportional amount of time that passed from the beginning of the performance or vesting period to the trigger date.” In addition, the policy states that boards which accelerate awards in full should provide a disclosure of their rationale for doing so in a public filing. The policy applies not only to performance shares but also to stock options and restricted stock, in which vesting is often considered a form of retention. In the latter cases, there would a strong rationale to consider accelerating the awards given that the retention objective is no longer being fulfilled. However, the policy is critical of executives receiving both cash severance and accelerated equity.
The change comes at a time of significant debate over the treatment of equity upon change-in-control situations. Companies that provide for the pro-rated vesting of unvested equity in change-in-control situations have long been a target of shareholders through the engagement and shareholder proposal process. For example, last week Amalgamated Bank announced agreements with five energy companies to limit change-in-control payments in a fashion consistent with the CII policy. By permitting the board the discretion to award full acceleration when needed, the new CII policy at least recognizes the business reality facing executives who may be sacrificing future compensation by choosing to enter into a change-in-control situation which are in the best interest of shareholders.