Dealing With Stock Price Volatility In Equity Compensation Plans

By Steven H. Sholk, Esq.1

Steven H. Sholk identifies and outlines the issue with stock volatility in equity compensation plans and offers various approaches to address such prospect to help ensure the adequacy of a plan’s share reserve and avoid upending established award practices.

Companies that sponsor equity compensation plans often face volatility in the price of the company’s stock. This volatility, especially declines in price, can put unexpected pressure on the adequacy of the plan’s share reserve and upend established award practices. Indeed, this prospect can cause companies to envy the lovelorn man in the song I Can’t Get Started With You who sold short in 1929.2 But unlike the lovelorn man in that song, companies can get started with approaches to address this prospect. This article discusses those approaches.

The effects of price volatility often turn on how the plan limits awards to participants individually and in the aggregate. Plans may place an annual limit on individual awards, especially on awards to nonemployee directors. The annual limit is often expressed as a dollar amount, and occasionally as a limit on the number of shares. In addition, the plan may place an annual limit on the aggregate amount of all awards, which may be expressed as a dollar amount, a number of shares, or a percentage of common shares outstanding.3 Most importantly, the plan will place a limit on the aggregate number of shares subject to all awards during the term of the plan, otherwise known as the share reserve.

Use of a dollar amount provides consistent grant date value by adjusting the number of shares on the grant date to match the dollar amount, and consistent proxy disclosure regardless of fluctuations in stock price.4 It is often used by established companies with less stock price volatility. However, when a plan limits awards by dollar amount, and the company’s stock price declines, the decline results in a larger number of shares per grant. The increase in the number of shares per grant can put pressure on the plan’s annual individual and aggregate limits and the share reserve. Furthermore, if the company has experienced reduced cash flow, it may shift from annual or long-term cash bonuses to equity compensation. In these situations, the plan’s share reserve will be depleted more rapidly, and the plan’s burn rate and level of shareholder dilution will increase.

For example, if the company’s stock price declines by 25%, the number of shares needed to deliver the same dollar value as before the decline increases by 33.3%. If the company’s stock price declines by 50%, the number of shares need to deliver the same dollar value as before the decline increases by 100%.5

Companies facing stock price volatility should consider approaches to reduce the rate of depletion of the share reserve, otherwise known as the plan’s burn rate. When a plan limits awards by a dollar amount and the company’s stock price declines so that the number of shares per grant increases, the company may wish to stanch this increase by amending the plan to limit awards by the number of shares. This approach is often used by companies that have recently gone public. It provides a lower burn rate and less dilution of shareholders, and can head off claims by proxy advisors and institutional shareholders of an undeserved economic windfall for directors and executives. When the company wishes to amend the plan to limit awards by the number of shares, under the NYSE and NASDAQ listing rules as long as the amendment does not increase the share reserve, the amendment is not a material revision to the plan that requires shareholder approval.6

Another approach is to set a floor below which the price per share value used to determine the number of shares in an award will not fall. The floor will apply regardless of the share’s market value. A variation on this approach is to use the same price used for a prior grant made in a less volatile market when stock prices were higher. Since these approaches reduce the number of shares available per grant, they have employee retention risk.

When the plan places an annual limit on the aggregate amount of all individual awards expressed as a percentage of common shares outstanding, this approach provides a more predictable burn rate and dilution of shareholders. It is often used by private companies and companies that have recently gone public.

When a plan limits annual awards by dollar amount, the company has to consider how to determine the annual dollar limit. One method is the value under Financial Accounting Standards Board Accounting Standards Codification Topic 718. Another method is the fair market value on the grant date, such as the closing price. However, when shares are subject to substantial volatility, use of a single day spot price can reflect a major price fluctuation. One way to avoid this result is for the plan to use a thirty to sixty day trailing average of closing prices, which smooths out the effect of volatility. When a plan does not use a trailing average to determine award limits and the company wishes to amend the plan to provide for its use, under the NYSE and NASDAQ listing rules the amendment is not a material revision to the plan that requires shareholder approval.7

If after taking any of the foregoing approaches the company faces the prospect of depleting the share reserve and being unable to make ordinary course annual awards, the company will need to increase the share reserve. Under the NYSE and NASDAQ listing rules, a material increase in the share reserve is a material revision to the plan that requires shareholder approval.8 In determining the number of additional shares to request approval for, the company should take into account the decline in stock price and any shift from cash compensation to equity compensation. It should also assess the risk that if its stock price recovers as part of a sector or other macroeconomic recovery, proxy advisors and institutional shareholders will view the awards as an undeserved economic windfall for directors and executives, rather than an appropriate reward for company or individual performance.

Pending shareholder approval, to avoid fully depleting the share reserve a company should consider the following five approaches to making annual awards. First, the company can adopt an across-the-board reduction in the number of shares to be used for awards. This approach has employee retention risk.

Second, the company can make larger awards to key executives, and either forego awards to employees below a certain level or limit awards to those employees to a specified percentage of the employee population. This approach has employee retention risk for the adversely affected employee population.

Variations on this approach are the grant of awards only to employees below the executive level; the grant to employees, especially those below the executive level, of the right to select their mix of awards, e.g., 50% options and 50% restricted stock units; and a partial grant of awards before the annual meeting and the remainder after shareholder approval is obtained at the annual meeting.9

With these approaches, the company often uses restricted stock units for a greater portion of annual awards.10 Unlike options, restricted stock units do not require stock price appreciation to provide intrinsic value and therefore provide value in declining markets. Furthermore, restricted stock units require fewer shares than options to deliver the same dollar grant value as options, and therefore are less dilutive of shareholders than options. Finally, when a plan provides for restricted stock, under the NYSE and NASDAQ listing rules amendment of the plan to provide for restricted stock units is not a material revision to the plan that requires shareholder approval.11

Third, a company can make cash-settled awards of phantom stock or stock appreciation rights outside of a shareholder-approved plan. The disadvantage of cash-settled awards is that they are treated as liability awards subject to variable or markto-market accounting. Under the NYSE and NASDAQ listing rules, shareholder approval for cash-settled awards is not required.12

Fourth, a company can make inducement awards for newly hired employees. Under the NYSE and NASDAQ listing rules, inducement awards do not require shareholder approval or count against share limits on individual awards or the share reserve.13 To make inducement awards, a company can use a separate share pool under an existing equity compensation plan, adopt a separate equity compensation plan limited to inducement awards, or make inducement awards outside of an equity compensation plan. The company should understand that proxy advisors consider inducement awards when assessing plan cost, burn rate, and overhang. Proxy advisors also treat inducement awards as outstanding awards when determining the number of shares available for future equity plan proposals.

Fifth, subject to the NYSE and NASDAQ listing rules, a company can create a legally binding right of a promise to grant awards after the annual meeting contingent on shareholder approval to increase the share reserve.14 With this approach, the company must safely navigate the notoriously complex rules of Section 409A of the Internal Revenue Code for nonqualified plans of deferred compensation, 15 and its regulatory exemptions for options, stock appreciation rights, and restricted stock.16

The exemptions for options and stock appreciation rights allow employees to exercise these stock rights at any time after vesting free from the shackles of the Section 409A limitations on the permissible exercise times and events. To come within these exemptions, the exercise price must be equal to or greater than the fair market value of the stock on the date of grant of the option or stock appreciation right.17 Therefore, correctly determining the date of grant is essential to ensure that the exercise price satisfies this requirement.18

The date of grant is the date when the granting corporation completes the corporate action necessary to create a legally binding right constituting the option or stock appreciation right. The corporate action is not complete until the date on which the maximum number of shares that can be purchased and the minimum exercise price are fixed or determinable, and the class of underlying stock and the identity of the employee are designated.19

Ordinarily, if the corporate action provides for an immediate offer of stock for sale to an employee, or provides for a particular date on which such offer is to be made, the date of grant is the date of such corporate action if the offer is to be made immediately, or the date provided as the date of the offer.20

If the company imposes a condition on the grant of an option or stock appreciation right, such condition generally will be given effect. However, if the grant of an option or stock appreciation right is subject to shareholder approval, the date of grant is determined as if the option or stock appreciation right had not been subject to shareholder approval.21

When a company promises to grant options or stock appreciation rights after the annual meeting contingent on shareholder approval to increase the share reserve, and the promise does not provide an exercise right or establish a fixed or determinable exercise price, a grant does not occur. The promise is not a legally binding right constituting an option or stock appreciation right. In addition, the shareholder approval is to increase the share reserve for all future grants, and not for the grant of any option or stock appreciation right to any employee. The grant occurs when the company issues the option or stock appreciation right after shareholder approval is obtained. To come within the exemption from Section 409A, the exercise price must be equal to or greater than the fair market value of the stock on that grant date.

For restricted stock, the Section 409A regulations focus on whether there is a legally binding right to receive nonvested or vested property in a future taxable year. There is a two-step analysis. First, whether there is a legally binding right to compensation, which here is the restricted stock. Second, whether the legally binding right to compensation is a deferral of compensation.

A legally binding right to compensation generally means a contractual right, regardless of whether the right is conditional or contingent, that is enforceable under the law governing the contract. It also includes an enforceable right created by governing law, such as a statute. For example, an agreement to pay an employee a bonus equal to a percentage of the amount that the employer receives on sale of a property is a legally binding right to compensation. The requirement that the property be sold is a condition to the right to the payment, but the right to payment is a legally binding right created when the parties enter into the agreement.22

There is a deferral of compensation when an employee has a legally binding right during a taxable year to compensation that is or may be payable to, or on behalf of, the employee in a later taxable year. A legally binding right to an amount that will be excluded from income when and if received is not a deferral of compensation unless the employee has received the right in exchange for, or has the right to exchange for, an amount that will be includible in income.23

The Section 409A regulations provide specific rules for whether a legally binding right to receive property in a future taxable year is a deferral of compensation. A legally binding right to receive property in a future taxable year in which the property will be substantially nonvested under Treasury Regulation Section 1.83-3(b) at the time of transfer will not provide for the deferral of compensation.24 However, a legally binding right to receive property in a future taxable year in which the property will be substantially vested under Treasury Regulation Section 1.83-3(b) at the time of transfer may provide for the deferral of compensation.25

In the case of an award of nonvested shares, since the creation of the legally binding right to the transfer of the shares is not a deferral of compensation, the legally binding right can provide for the transfer within thirty days of shareholder approval regardless of whether shareholder approval occurs in the same taxable year as the creation of the legally binding right or in the following taxable year.

In the case of an award of vested shares, the creation of the legally binding right to the transfer of the shares is a deferral of compensation. Accordingly, the company should ensure that the legally binding right satisfies the requirements of Section 409A or an exemption thereto. There are three potential scenarios. First, the company creates a legally binding right before the annual meeting to transfer vested shares once shareholder approval is obtained at the meeting, and the annual meeting and transfers must occur in the same taxable year as the creation of the legally binding right. Under this scenario, there is no plan for the deferral of compensation.26

Second, the company creates a legally binding right before the annual meeting to transfer vested shares once shareholder approval is obtained at the meeting, and the annual meeting and transfers must occur no later than the end of the short-term deferral period ending on March 15 of the following taxable year. Under this scenario, the legally binding right is a short-term deferral exempt from Section 409A.27

Third, the company creates a legally binding right before the annual meeting to transfer vested shares once shareholder approval is obtained at the meeting, and the annual meeting and transfers can occur after the end of the short-term deferral period ending on March 15 of the following taxable year. Under this scenario, the arrangement is a plan of deferred compensation subject to Section 409A. As a result, the transfer of the vested shares must satisfy the permissible distribution event of payment at a specified time or fixed schedule.28

Under the rule for payment at a specified time or fixed schedule, in the absence of a vesting event the amount of a payment cannot be based all or in part on the occurrence of an event.29 Since shareholder approval to increase the share reserve may come within this prohibition, the legally binding right should not provide for the transfer of shares at a time determined by reference to the date of shareholder approval. Rather, the legally binding right should provide for the transfer of shares on a specified date without reference to the date of shareholder approval. For example, if the company creates a legally binding right in December, and the annual meeting takes place in April in the following taxable year, the legally binding right should provide for the transfer of the vested shares in June.

Alternatively, the legally binding right can provide that the employee must be employed on the date of shareholder approval, and the transfer of the vested shares must occur within thirty days thereafter. This arrangement will be a short-term deferral exempt from Section 409A.30

For the creation of a legally binding right to the grant of restricted stock units contingent on shareholder approval to increase the share reserve, the creation of the legally binding right will not be a plan of deferred compensation. Restricted stock units are unfunded promises subject to vesting conditions to make future distributions of shares or cash equal to the value of the shares. The units are most often structured to provide that once they vest, distributions are made within the short-term deferral period so that the units come within the short-term deferral exemption.31 Alternatively, the units are structured to provide that once they vest, distributions are made on one or more Section 409A permissible distribution times and events so that the units comply with Section 409A.32

The grant of an unfunded restricted stock unit is not a taxable event.33 Accordingly, the creation of a legally binding right to the grant of an unfunded and unvested restricted stock unit contingent on shareholder approval to increase the plan reserve is not a deferral of compensation. The company can create a legally binding right before the annual meeting to grant a restricted stock unit once shareholder approval is obtained at the meeting. The legally binding right can provide for the grant within thirty days of shareholder approval regardless of whether the annual meeting occurs in the same taxable year as the creation of the legally binding right or in the following taxable year before or after March 15. Once the company grants the restricted stock unit that entitles the employee to distribution of stock or cash, the grant must satisfy the requirements of Section 409A or an exemption thereto.

Endnotes

1. Steven H. Sholk is Counsel in the Corporate Department in the Newark, N.J. office of Gibbons P.C.

2. I Can’t Get Started With You, Music by Vernon Duke and lyrics by Ira Gershwin (Chappell & Co. 1936) (“You’re so supreme, lyrics I write of you. Scheme just for a sight of you. Dream both day and night of you. And what good does it do? In 1929 I sold short. In England I’m presented at court. But you’ve got me down-hearted ‘cause I can’t get started with you.”); see also Ted Gioia, The Jazz Standards A Guide to the Repertoire, “I Can’t Get Started With You,” at 172 (Oxford University Press 2d ed. 2021) (“The clever premise here is for the singer to enumerate many grand accomplishments ̶ circumnavigating the globe or breaking par on the golf course ̶ in each eight-bar A theme, before concluding ‘but I can’t get started with you.’ The song ranks among the most popular ‘list songs’ of the first half of the twentieth century.”).

3. See Olivia Wakefield, James Dickinson, David Fitt & Joey Franks, Pay Governance, Biotech Equity Is Largely Underwater: Now What? Alternatives to Option Exchanges or Repricing, at 4 (March 14, 2023) (available at www.paygovernance.com/viewpoint/biotech-equity-is-largely-underwater-now-what).

4. See David A. Katz & Laura A. McIntosh, “Dealing With Director Compensation,” New York Law Journal, May 21, 2015, at 5; Alec Lentz & Ken Sparling, “Scrutiny And Standardization Of Director Pay,” The Corporate Board, at 8-9 (May/June 2016) (available at www.fwcookcom/ alert...05-16_Scrutiny_And_Standardization_of_Director_Pay.pdf).

5. Louis C. Taormina & Rachel Chiu, FW Cook, Equity Grants in Volatile Times, at 2 (Jan. 29, 2023) (available at https://www.fwcook.com/Publications-Events/Articles/Equity-Grants-in-Volatile-Times/).

6. NYSE Listed Company Manual §303A.08 and Frequently Asked Questions on Equity Compensation Plans §B-6 (if a plan with a fixed maximum number of shares out of which certain grants are made pursuant to a formula is amended to change the formula, the amendment is not a material revision as long as the shares granted pursuant to the formula continue to count against the maximum number and the maximum number remains unchanged); cf. NYSE Listed Company Manual, Frequently Asked Questions on Equity Compensation Plans §B-4 (an existing plan provides for the grant of options and restricted stock subject to an overall limit of 10 million shares that may be delivered pursuant to options and restricted stock grants together, and a further limit of 1 million shares available for restricted stock; an amendment to materially increase the restricted stock limit but not the aggregate 10 million share limit is a material revision; it is similar to the material revisions of the expansion of the types of awards available under the plan and a material increase in the number of shares available under the plan).

NASDAQ Listing Center, Rule 5635(c) and Frequently Asked Questions, Identification No. 227 (July 31, 2012) (if a plan provides for periodic automatic awards of a specific number of options, for example, annual awards of 10,000 options, it is not a material amendment to increase the awards to 15,000; generally, increasing the size of awards is not a material amendment provided that the maximum number of shares available under the plan is not increased); cf. NASDAQ Listing Center, Frequently Asked Questions, Identification No. 1673 (Jan. 11, 2019) (a plan must provide for an overall limit on the number of shares that may be issued under the plan; a plan may also have a further sublimit on the number of shares available for a particular type of award, such as restricted stock or options; a revision to increase the number of shares available under the sublimit would generally be a material amendment to the plan because this change would be an expansion of the types of awards available under the plan).

7. NYSE Listed Company Manual §303A.08; NASDAQ Listing Center, Rule 5635(c).

8. NYSE Listed Company Manual §303A.08 and Frequently Asked Questions on Equity Compensation Plans §B-1; NASDAQ Listing Center, Rule 5635(c), IM-5635-1 (March 12, 2009), and Frequently Asked Questions, Identification Nos. 219 and 226 (July 31, 2012).

9. See Olivia Wakefield, James Dickinson, David Fitt & Joey Franks, Pay Governance, Biotech Equity Is Largely Underwater: Now What? Alternatives to Option Exchanges or Repricing, at 5-7 (March 14, 2023) (available at www.paygovernance.com/viewpoint/biotech-equity-is-largely-underwater-now-what).

10. See Michael Keebaugh, Brian Lane & Ryan Peterson, Pay Governance, Biotech Industry Trends in Equity Compensation: Influence of Market Volatility on Equity Program Strategy, at 8 (Oct. 10, 2023) (“The recent increase in the use of RSUs was in reaction to several factors, starting with the market downturn (e.g., the need to retain talent in a competitive market, desire to conserve cash, and declining perceived value of options), and we anticipate that they will remain a popular vehicle among biotech companies. Nevertheless, we expect that stock options will continue to be the primary equity vehicle of choice.”) (available at https://www.paygovernance.com/viewpoints/biotech-industry-trends-in-equity-compemnsation-influence-of-market-volatility-on-equity-program-strategy).

11. NYSE Listed Company Manual, Frequently Asked Questions on Equity Compensation Plans §B-3 (if a plan provides for restricted stock, an amendment to permit the award of restricted stock units is not a material revision that requires shareholder approval; options, stock-settled stock appreciation rights, and similar awards based on the appreciation in value of stock over an exercise or base price are one type of award; restricted stock, restricted stock units, and similar wards without any exercise or base price are a second type; since restricted stock units and restricted sock are the same type of award, this revision is not material).

NASDAQ Listing Center, Frequently Asked Questions, Identification No. 233 (July 31, 2012) (shareholder approval is not required to add restricted stock units to a plan that allows for restricted stock; an award of restricted stock units typically results in the issuance of restricted stock on a deferred basis after vesting requirements are met; as such, this type of award is substantially equivalent to the award of restricted stock, and if the plan allows for the award of restricted stock, the addition of restrict4ed stock units is not a material modification that requires shareholder approval; shareholder approval would be required to add restricted stock units to a plan that does not provide for restricted stock awards because the addition would expand the types of awards available).

12. NYSE Listed Company Manual §303A.08; NASDAQ Listing Center, Rule 5635(c) and Frequently Asked Questions, Identification No. 232 (July 31, 2012).

13. NYSE Listed Company Manual §303A.08; NASDAQ Listing Center, Rule 5635(c)(4), IM-5635-1 (March 12, 2009), and Frequently Asked Questions, Identification Nos. 247, 251, 253, 258, and 259 (July 31, 2012 and Nov. 26, 2019).

14. See NYSE Listed Company Manual, Frequently Asked Questions on Equity Compensation Plans §E-2 (if shareholder approval of a new equity compensation plan is required, grants may not be made before the approval is obtained regardless of whether the grants are forfeited if the shareholder approval is not obtained, and no shares may be issued until the approval is obtained; grants may be made before shareholder approval provided that no shares can actually be issued pursuant to the grants until shareholder approval is obtained; for example, a company could grant stock options that would not become exercisable until after shareholder approval is obtained; restricted stock could not be issued before shareholder approval because restricted stock is issued upon grant; however, the company could promise to issue restricted stock at a future date after shareholder approval is obtained).

NASDAQ Listing Center, Frequently Asked Questions, Identification No. 212 (July 31, 2012) (a company may adopt an equity plan and grant options prior to obtaining shareholder approval provided that: (i) no options can be exercised prior to obtaining shareholder approval; and (ii) the plan can be unwound and the outstanding options cancelled if shareholder approval is not obtained ); NASDAQ Listing Center, Frequently Asked Questions, Identification No. 213 (July 31, 2012) (unlike the situation in which the exercise of stock options is contingent on shareholder approval, a company may not grant shares of stock prior to obtaining shareholder approval).

15. Section 409A was added to the Internal Revenue Code by the American Jobs Creation Act of 2004, Pub. L. No. 108-375, §885, 118 Stat. 1418, 1634-41. The formidable final Section 409A regulations were issued at the Department of the Treasury, Internal Revenue Service, “Application of Section 409A to Nonqualified Deferred Compensation Plans, Final Regulations,” 72 F.R. 19,234 (April 17, 2007), and Department of the Treasury, Internal Revenue Service, “Application of Section 409A to Nonqualified Deferred Compensation Plans, Correction,” 72 F.R. 41,620 (July 31, 2007).

Cf. The Temptations, Ball of Confusion (That’s What the World is Today), Music and lyrics by Barrett Strong & Norman Whitfield, on Greatest Hits II (Gordy 1970) (“Evolution, revolution, gun control, sound of soul. Shooting rockets to the moon, kids growing up too soon. Politicians say more taxes will solve everything. And the band played on.”).

16. I.R.C. §409A(e) (the Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of Section 409A) (introductory text); Treas. Reg. §1.409A-1(b)(5)(i)(A)-(B) (exemptions for options and stock appreciation rights); Treas. Reg. §1.409A-1(b)(6) (exemption for restricted stock).

17. Treas. Reg. §1.409A-1(b)(5)(i)(A)-(B). The rules for determining the fair market value of stock readily tradable on an established securities market and stock not so readily tradable are set forth in Treas. Reg. §1.409A-1(b)(5)(iv).

See generally Gregg D. Polsky, “Fixing Section 409A: Legislative and Administrative Options,” 57 Villanova Law Review 635, 645 (2012); David I. Walker, “The Non-Option: Understanding the Dearth of Discounted Employee Stock Options,” 89 Boston University Law Review 1505 (2009).

18. Treas. Reg. §1.409A-1(b)(5)(vi)(B) and (H).

19. Treas. Reg. §1.409A-1(b)(5)(vi)(B)(1).

20. Id.

21. Treas. Reg. §1.409A-1(b)(5)(vi)(B)(2).

22. Department of the Treasury, Internal Revenue Service, “Application of Section 409A to Nonqualified Deferred Compensation Plans, Explanation of Provisions and Summary of Comments,” §III.B (first and second paragraphs), 72 F.R. 19,234, 19,236 (April 17, 2007).

See also Sutardja v. United States, 109 Fed. Cl. 358 (2013) (in determining whether a legally binding right is created, courts look initially to state law to determine the rights and interests of the taxpayer in property that the government seeks to reach; once this determination is made, federal tax law determines which rights and interests are subject to tax; under California law vested options give the optionee the legally binding right to purchase shares at a designated price; grant of a discounted option for stock traded on NASDAQ was a deferral of compensation in violation of Section 409A and the exercise of a vested option in 2006 was subject to tax under Section 409A; Section 409A treatment of option exercised in 2006 was governed by law in effect prior to the issuance of the final Section 409A regulations).

23. Treas. Reg. §1.409A-1(b)(1).

24. Treas. Reg. §1.409A-1(b)(6)(ii).

25. Id.

26. Treas. Reg. §1.409A-1(b)(1).

27. Treas. Reg. §1.409A-1(b)(4) and (d).

28. I.R.C. §409A(a)(2)(A)(iv); Treas. Reg. §§1.409A-1(b)(4) and (d) and 1.409A-3(a)(4) and (i)(1).

29. Treas. Reg. §1.409A-3(i)(1).

30. Treas. Reg. §1.409A-1(b)(4) and (d); Erica F. Schohn, “Equity Arrangements,” in Section 409A Handbook 14-1, 25 ex. 3 and 4 (Regina Olshan & Erica F. Schohn eds., Bloomberg Law 2023) (in hiring an employee, the employer awards the employee a legally binding right to receive fully vested common stock on the third anniversary of his date of hire so long as he remains employed through the grant date. The arrangement to transfer vested common stock in the future is a deferral of compensation that is not exempt from Section 409A by reason of being a transfer of property that is not vested under Section 83, but the arrangement is likely exempt from Section 409A as a short-term deferral).

See also Securities & Exchange Commission Form 8-K, Cedar Fair, L.P., Item 5.02 (Dec. 4, 2023) (Cedar Fair granted unit-based awards to certain named executive officers in recognition of their efforts in connection with Cedar Fair’s entry into the merger agreement dated Nov. 2, 2023 with Six Flags Entertainment Corporation, and to facilitate the successful completion and closing of the merger; units will only be earned under the awards if the closing occurs and upon closing the awards will be converted into awards relating to shares of common stock; 50% of the equity would be payable twelve months after Dec. 4, 2023, and the other 50% of the equity would be payable eighteen months after Dec. 4, 2023; the recipient officers must remain in continuous employment with Cedar Fair through the closing and with the combined entity from the closing through both payment dates).

31. Treas. Reg. §1.409A-1(b)(4) and (d).

32. I.R.C. §409A(a)(2)(A); Treas. Reg. §1.409A-3(a); see also Regina Olshan, Daniel Hogans & Russell E. Hall, Equity Pitfalls Under Section 409A Checklist, Practical Law Checklist 3-502-9252, at 1-6 (Thomson Reuters 2023).

33. I.R.C. §83(a); Treas. Reg. §1.83-1(a).