Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
I got some great feedback to yesterday’s questions posed about Microsoft’s novel underwater option arrangement with JP Morgan from several community members.
Art Meyers of Palmer Dodge notes that the existence of the JP Morgan program raises the possibility that any stock options issued in the future by Microsoft might be taxable at grant under the Section 83 IRS regulations. The analysis is if JP Morgan’s valuation program can be viewed as causing the company’s stock options to be considered “actively traded on an established market” within the meaning of IRS Reg. 1.83-7(a) and (b)(1), then future options (whether immediately exercisable or not) might be taxable upon grant, not exercise.
Furthermore, even if this trading criteria is not met, a future option that is fully vested when issued (or perhaps even an early exercise option) and is freely transferable could be taxable upon grant under IRS Reg. 1.83-7(b)(2). That subsection generally only requires such an option to have a fair market value which can be “measured with reasonable accuracy.”
Let me know if you have anything to add to Art’s reasoning. I will post additional community member thoughts tommorrow.
By the way, Mike O’Sullivan of Munger Tolles provides some detailed background about Microsoft’s plans in his excellent “Corp Law Blog” at http://www.corplawblog.com.
Today’s problem for the day (as sent by a community member): Does anyone understands how the proposed Microsoft plan to have employees sell underwater options to JP Morgan works? It would seem options registered on an S-8 are generally not transferable (See General Instruction A to Form S-8) but perhaps an S-3 could be filed or something. Is this a tender offer by Morgan? Also, if the option agreement provides for nontransferability, or if the plan documents provide for nontransferability, can those provisions be waived without shareholder approval as a material amendment? What are the accounting issues associated with an amendment? We will post answers soon – but if you have any thoughts, send them to broc.romanek@thecorporatecounsel.net.
As reported by Alan Dye on Section16.net, last week the SEC sent over 600 letters of rejection to companies that tried to file Section 16 reports on paper.
Even more troublesome is that we hear that companies might believe they have successfully filed a report through the SEC’s new system – because they did not receive a rejection email – yet the filing was not successful. It is critically important to go to the SEC’s Edgar database each time you believe you have made a filing to confirm the filing was made!
Please share any similar horror stories with us by sending me an email at broc.romanek@thecorporatecounsel.net.
Back in the saddle after a trip to Yellowstone (most beautiful place on the mainland) and the annual conference of the American Society of Corporate Secretaries (always one of the best). At the ASCS conference, there was much discussion about drafting reporting-up policies before the August 5th implementation date.
Many companies and law firms have waited to see how the SEC would proceed after its January reproposal of “reporting out.” But now that it appears that the SEC might not act before August 5th, they are hastily putting a policy together. For TheCorporateCounsel.net subscribers, we have put together an “Attorney Responsibility Portal,” complete with a sample reporting up policy and an interview with Kris Sharpe on issues to consider regarding QLCCs (among other items). The Attorney Responsibility Portal is at http://www.thecorporatecounsel.net/member/FAQ/attnyresponsibility/index.htm.
Well, I hope my ability to interact with Broc’s blogging software has improved since Tuesday.
It’s been a busy week absorbing the new NYSE and Nasdaq equity compensation plan shareholder approval rules. At this point, it seems that practitioners have more questions than answers. Those of us on the west coast technology world are of course focusing primarily on the Nasdaq side of things, and our questions on those new rules include:
What is a bona fide period of unemployment?
When Nasdaq says that it “recommends” that plans meant to permit repricing use explicit terminology to make this clear, what does it mean in practical terms? It stops short of saying that the plans “must” include explicit terminology. We anticipate that Nasdaq will get many questions on this issue.
Does the exception from the shareholder approval requirement in a merger context (where the acquiror “acquires” shares under a target shareholder-approved plan and may issue such shares under awards to certain employees of the combined entity post-deal) apply where the target was private before the transaction? We think it should, but need Nasdaq to weigh in on this.
If an acquiror “acquires” target plan shares in a merger in the above manner, can it use the shares so acquired under any plan (e.g., use target ESPP shares to issue regular stock options post-deal)? There is language in the release to support this conclusion.
If an acquiror acquires a target plan that includes a shareholder-approved evergreen, can the evergreen continue to add shares to the plan after the deal and if so how would this work in terms of calculating the number of shares to be added each period (maybe the fixed number in most evergreens would apply by default)?
What is meant by the statement that a company “would not be permitted to use repurchased shares to fund options without prior shareholder approval”? We think this sentence is just meant to underscore that there is no free pass (as there never has been for Nasdaq companies) to use treasury shares unless you have shareholder approval of the maximum number to be so used. But the wording is causing some consternation.
Is the exception from shareholder approval for tax-qualified plans absolute? So, for example, if a company had a 20-year ESPP with an evergreen, would the tax-qualified plan exception mean that the company would not have to obtain new shareholder approval of the plan after ten years (as it would apparently be required to do if the plan were an option or other non-tax-qualified plan)?
Is it permissible to grant an award under a plan that has not yet received shareholder approval, where the grant is made contingent upon later shareholder approval?
And I’d guess there are many questions arising with respect to the grandfathering of old plans.
On another note, while the Disney and Abbott Labs cases have garnered a lot of attention recently about where the courts are on director duties and liability, I’ve just had a chance to read the Delaware Chancery Court opinion in the Oracle Corp. Derivative Litigation (June 17, 2003). The Court conludes that an Oracle Special Litigation Committee was not independent (and therefore won’t accept its findings) because of various ties between both the SLC members and the company insiders involved in the litigation to Stanford University. The opinion seems to underscore how different the Delaware courts’ attitudes on these issues are from a couple of years ago — it shows the court looking under every rock to identify potential conflicts. This seems like it will be a controversial case — it will be interesting to see where it goes from here. I’d recommend the opinion for your holiday weekend reading list (2003 Del. Ch. LEXIS 55).
While Broc is enjoying the wild west (Yellowstone) with his family this week, a lot has already happened on the SEC front.
Section 16. First, yesterday, June 30th, was the effective date for mandatory electronic filing and website posting of Section 16(a) reports. Not only did the SEC make this requirement effective one month earlier than required by Sarbanes-Oxley, but in doing so they also created a new online filing service that is intended to simplify the filing process for Section 16 reporting persons. There are still some kinks being worked out in the new online system (the SEC is planning an upgrade to the system at the end of July), but this system is streamlining the filing process and hopefully making the insider transaction information reported more accessible to the general public.
SEC Staff indicated that on each of Friday and Monday they received about 500 electronically filed Forms 4. The Staff also indicated that the Commission rejected paper Section 16 filings it received on Monday (about 250 in total).
NYSE/Nasdaq Rules. In addition, and after much anticipation, yesterday the SEC approved new rules proposed by NYSE and Nasdaq that expand the shareholder approval requirements for equity compensation plans for NYSE- and Nasdaq-listed issuers. As expected, these new rules became effective yesterday, June 30th (on an accelerated basis). In the same release, the SEC also approved a change in the NYSE Rule 452, eliminating the ability of brokers to vote shares held in “street name” on equity compensation matters (at least those below the 5% dilution threshold level, deemed to be “routine” matters under the prior rule) unless the beneficial owner of the shares has given the broker specific voting instructions with respect to the plan proposal. This broker voting rule has a 90-day transition period prior to becoming effective, meaning that it will be effective for shareholder meetings that occur on and after September 28, 2003. The SEC release on these shareholder approval and broker voting matters is located at http://www.sec.gov/rules/sro/34-48108.htm.
The Delaware courts have been amazing busy issuing opinions over the past few weeks that appear to be dramatically changing the corporate governance landscape – the latest is from the Delaware Supreme Court in Krasner v. Moffett.
This opinion reverses the dismissal of a stockholder class action challenging the merger of Freeport-McMoRan Sulphur and McMoRan Oil & Gas into McMoRan Exploration Co. The Chancery Court granted the defendants’ motion to dismiss on the grounds that the merger, which did not involve a majority stockholder, had been negotiated by a special committee of independent directors and, therefore, the business judgment rule applied. The Supreme Court reversed on the ground that it was reversible error to dismiss the complaint under Rule 12(b)(6) at the pleading stage – and that a factual record needed to be developed to determine what standard of review applies (i.e., whether the business judgment rule or entire fairness standard applies). The Supreme Court reached this conclusion even though the plaintiffs did not plead facts establishing that the special committee members were not independent.
I blog this as i prepare to take a week off in Yellowstone (my first time) and am happy to note that Sharon Hendricks from the Venture Law Group will be our guest blogger for next week. I’m sure Sharon will give you the “skinny” on how mandatory Section 16 e-filing fares in its first few days. Enjoy!
To help kick off a special offer of a subscription to TheCorporateCounsel.net – $250 for the rest of 2003 (for a single user – multiple user pricing is half price for rest of 2003) – we have launched a new website called AccountingDisclosure.com. Learn more about the special offer at https://www.thecorporatecounsel.net/subscribe/CCNET_NEW/login.asp.
This website is devoted to accounting and auditing issues – and is a “one-stop” site that provides a host of resources to help you grapple with an increasingly complicated area that derives its guidance from dozens of sources. This site is yet one more benefit of subscribing to TheCorporateCounsel.net (non-members pay $395/yr. for access to AccountingDisclosure.com). Learn more about what is on AccountingDisclosure.com at http://www.accountingdisclosure.com/Misc/More.htm.
The 11-Ks are starting to roll in – and almost all of them now contain a 906 certification (although in various forms and signed by a variety of officials).
In Congress, the Senate and House passed the Accountant, Compliance, and Enforcement Staffing Act of 2003, which should help streamline the SEC’s efforts to add more accountants, economists and examiners to its staff. The new law will allow the SEC to hire accountants, economists and securities compliance examiners under the excepted service authority (lawyers already can be hired on under this authority) – rather than under the federal competitive service process.
Under excepted service authority, the hiring process can be completed in a few weeks’ time as opposed to the months-long time frame often necessary under competitive service requirements. However, the expedited process doesn’t really help if there are no accountants to hire! See http://www.sec.gov/news/press/2003-76.htm.
For Section16.net subscribers and NASPP members, today is the “Nuts and Bolts of Section 16 Electronic Filing” featuring Alan Dye and Herb Scholl of the SEC, among others. This program will walk you through the complicated process of making a filing on the SEC’s new system that is mandatory next Monday – see http://www.section16.net/Webcast/0603-b.htm.
Late Friday, the NYSE told listed companies that its revised listing standard requiring shareholder approval of equity compensation plans – and prohibiting the use of broker nonvotes for those votes – will become effective as of June 30th (and will let its pilot program expire on that date). Now, the SEC must approve the NYSE’s final rule by June 30th – otherwise the following is subject to change.
The transition is as follows: plans adopted before June 30th are not subject to shareholder approval unless they are materially revised – with the exception of special transition rules that apply to “formula plans” and “discretionary plans” (at a minimum, all pre-existing plans may be used for a limited transition period ending on the first to occur of (1) the company’s next annual meeting at which directors are elected that occurs on or after December 27, 2003, (2) June 30, 2004, and (3) the expiration of the plan). For broker nonvotes, the final rules are effective for any shareholders meeting that occurs on or after September 28, 2003.
