Spring - Loaded Stock Awards

Bless the SEC for they have recently promulgated new guidance for Spring-Loaded Stock Awards (SLSA).In past years, executive stock compensation awards or grants just prior to the announcement of significant event, while maybe scrutinized, were never subject to enforcement action.They are now.

The trigger for this recent action by the SEC was the SLSA by Eastman Kodak in 2020.The day before the announcement of a $765 million government backed loan to produce drugs to combat COVID-19, the firm granted SLSAs to executives.Post the public disclosure the stock jumped up by 12 times.

This new SEC guidance applies mostly to public companies, and will also impact those poised to go public.The unstated principle is whether a private company with many shareholders should be impacted.Compliance at the SEC involves more about the valuation of the SLSAs prior to a positive, material financial event.This valuation is to be premised on the anticipated stock price which will result from the better-than-expected results or disclosure of a major transaction.

The effect of this SEC directive is intended for public companies.At the same time, how will shareholders of privately held firms respond when they are not privy to the impending significant news event and/or not part of the stock option grants?And will the Board of the private entity bear any liability or even require a fairness opinion?Time will tell.