August 8, 2006

Whether Silence is Golden for Anti-Dilution Provisions of Equity Plans

A handful of members dropped me a line responding to my query last week regarding silence in anti-dilution provisions of stock option plans and FAS 123: the question of whether as a matter of contract construction, an option plan (or warrant) that was silent about adjustment could be adjusted if the stock was split.

For example, Professor David Yermack of New York University noted that a seven-year old Delaware case – Sanders v. Wang, 1999 Del. Ch. Lexis 203 (11/8/99) – considered the very issue of a Computer Associates equity compensation plan that was silent about what to do in the event of a stock split. A very large restricted stock award to the CEO and several top managers was split in line with the company’s stock splits. A shareholder sued, alleging waste of corporate assets, since the plan had no provision for such an adjustment to a share award. The court agreed and ordered the top three executives to return the extra shares – 9.5 million shares since their restricted stock plan had no provision for increasing the inventory of shares when the stock split – which cost them close to $600 million on paper. Interestingly, Dick Grasso was one of the outside directors/defendants in the suit.

And Ken Stuart of Holland & Knight noted that in December 2001 – in Reiss v. Financial Performance Corporation, 97 N.Y.2d 195, 764 N.Y.S. 2d 658 (2001) – the New York Court of Appeals held that where a warrant was issued without any provisions for adjustment in the event of a stock split (or a reverse stock split), the Court would not read such provisions into the warrant in the case of a one-for-five reverse split. Thus, the holder could exercise for the full number of shares stated in the Warrant and not the after-split amount. The lower court had relied on a First Circuit case – Cofman v. Acton Corp., 958 F2d 494 (1992) – which had held that the parties there had not given any thought to dilution and that an essential term of the contract was missing, so it could be given effect by the court. However, the N.Y. Court noted in dicta that if they were dealing with a forward stock split, they might give effect to dilution on the theory that the holder did not intend to acquire nothing.

Is It Time to Merge the SEC and CFTC?

In Saturday’s WSJ, former SEC Chairman Arthur Levitt opines that the SEC and CFTC should be merged into one in this editorial. I’m not sure many would disagree since the two agencies have overlapping constituencies to some extent. But why stop there? There are a number of federal agencies that should be merged out of existence – but the “gov” is so tough to downsize. That’s why we have six federal agencies to regulate financial institutions (Fed Reserve, OCC, OTS, FDIC, OTS, NCUA)…

Spinning Off: ADP’s Proxy Delivery & Voting Business

Last week, ADP announced plans to spin off a combination of its brokerage, securities clearing and outsourcing divisions – which includes the proxy delivery and voting services that it offers to its broker clients (which result in services offered to beneficial owners). The spin-off is expected to be in the form of a tax-free dividend, paid by the middle of next year.

Since mother ADP is not expected to control the new spun-off entity, it should give more freedom to the folks running the proxy delivery/voting services to be innovative, etc. – and it shouldn’t adversely impact companies or their shareholders.