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Stock Ownership Guidelines Are Making Their Way Down To Small-And Micro-Cap Issuers

Boards of directors of small- and micro-cap issuers should consider adopting stock ownership guidelines to align the interests of its directors with the interests of stockholders and further promote the company’s commitment to sound corporate governance.

Our friend Adam J. Epstein of Third Creek Advisors recently published “A Buy-Side Perspective on Stock Ownership Guidelines,” which was distributed last week by the Nasdaq Amplify Program for small-cap companies. Whether micro- and small-cap companies like it or not, Mr. Epstein says stock ownership guidelines (for both officers and directors) are inexorably making their way down from mid- and large-cap companies. Smart micro- and small-cap issuers would be wise to get ahead of the curve in this regard, particularly with board members.

According to Mr. Epstein, a lion’s share of large-cap companies in the United States now require named executive officers (NEOs) and board members to attain a certain level of stock ownership within a defined time period, and then to maintain that ownership during the course of their tenures. The rationale for adopting stock ownership guidelines is that when officers and directors have actual “skin in the game,” their interests will be more aligned with the interests of shareholders, and they will have more incentive to focus on long-term value creation, promoting the company’s commitment to sound corporate governance. 

This trend appears to have reached small-cap issuers – 46% of public companies with revenue between $50 million and $500 million now have some form of stock ownership guidelines for board members (up more than 25% from 2012), according to the National Association of Corporate Directors.

For small-cap companies, Mr. Epstein suggests that a reasonable stock ownership guideline might require:

(i)        The CEO to hold shares of the company’s common stock with a value equal to three times (3x) the amount of his/her annual base salary;

(ii)        Other NEOs to hold shares of the company’s common stock with a value equal to one times (1x) the amount of their annual base salaries; and

(iii)       Non-executive board members to hold shares of the company’s common stock with a value equal to three times (3x) the amount of their annual cash retainers, calculated using the annual retainer as of the later of the date these guidelines are adopted or the date the director is elected to the board. 

Under many guidelines, directors are required to achieve the guideline within five years after the date of adoption of the guidelines or joining the board.

Shares that count towards satisfaction of the guidelines typically include:

•           Shares owned outright by the director or his/her immediate family members residing in the same household;

•           Shares held in trust for the benefit of the director or his/her family; and

•           Restricted stock and restricted stock units granted under the company’s incentive compensation plan (which is helpful to less highly-compensated NEOs of micro-cap companies without the financial resources to purchase a significant number of shares in the open market).

Stock options, which represent the right to receive shares, do not count towards satisfaction of the guidelines in almost all cases.

Please do not hesitate to contact the Olshan attorney with whom you regularly work or the attorney listed above if your company’s board would like additional information or require assistance in adopting stock ownership guidelines.

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