Securities Law Blog

Recently, Domino’s Pizza, Inc. announced that each month between December 5, 2016 and November 30, 2017, it will randomly select 25 members of its “Piece of the Pie Rewards” program to receive ten “free” shares of Domino’s common stock. Although members are limited to one winning entry, the stock sweepstakes afford anyone with a free “pizza profile” the opportunity to be entered into each monthly contest, which will result in a total of 3,000 shares awarded. Domino’s expects the expense associated with the contest to be approximately $500,000, based on current share prices for its common stock. Notably, the contest winners must open a brokerage account at Fidelity or use their personal preexisting Fidelity account to receive the winning shares. Domino’s will either provide Fidelity with the funds necessary to purchase the required number of shares of Domino’s common stock in the open market or will provide Fidelity with the necessary number of newly issued shares.

Marketers have applauded Domino’s creative use of a stock-giveaway contest to entice and retain customers. In a press release issued at the time of the contest’s announcement, Domino’s president remarked, “[p]rior to today, Domino’s Piece of the Pie Rewards members earned points toward free pizza. Now, we’re literally giving our customers a piece of the pie, in the form of shares of stock . . . . Whether they take the shares and start building a stock portfolio or sell them at market price, one thing is for sure – it’s all for the love of pizza!”

Giveaways of free stock, however, raise numerous SEC registration and corporate governance issues. Since stock-based loyalty programs like the one used by Domino’s involve the offer and sale of securities to the general public, companies must register the offering with the SEC and provide full and fair disclosure in the form of a registration statement to “investors,” or otherwise find an available exemption for a private sale. In large part, this is the reason that privately held companies have not been permitted to conduct “free stock” offerings via their websites without violating the SEC’s registration requirements. The SEC has held that even if the shares are “free,” the issuance of securities in consideration of a person’s registration on, or visit to, an issuer’s website (or even signing up by conventional mail) would be deemed an event of sale since it provides valuable information and benefits to the website owner, potentially allowing the company to charge higher advertising fees, for example. The SEC and state securities regulators have consistently initiated enforcement actions against non-exempt, unregistered “free” stock offerings.

Under many state corporation laws, shares are required to be issued for consideration in the form of cash, property or services, in an amount not less than the par value of the stock being issued. If they are not issued for adequate consideration, which in contrast to federal securities laws does not include filling out a registration form online, the shares are deemed void or voidable. In states such as Delaware, where the shares are voidable, the shareholder may seek to retain the shares by paying the original issuance price plus interest, or the issuing corporation may seek to assess those who paid less than par value for their stock. Importantly, in approving stock giveaway programs, corporate boards must determine whether approval of any such contest is consistent with their state law fiduciary duties.

Properly structured with appropriate consideration given to federal and state legal concerns, free stock giveaways present a creative way for a consumer-facing company to give thanks to its customers for their loyalty and let them develop a greater proprietary interest in the company’s products and services.

Spencer G. Feldman, Partner, Olshan Frome Wolosky LLP