Posted on October 1, 2007 by Joseph M. Wallin

Senator Levin Introduces the "Ending Corporate Tax Favors for Stock Options Act"

On September 28, 2007, Senator Carl Levin introduced the "Ending Corporate Tax Favors for Stock Options Act."

The bill would limit the deduction for compensation for personal services paid for with stock options to an amount that would not exceed the amount the taxpayer has treated as an expense with respect to such stock options for the purposes of ascertaining income, profit or loss in a report or statement to shareholders, partners or other proprietors, and would allow the deduction in the same period the accounting expense is recognized.

You can find a summary of the impact of the bill's provisions here.

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Posted on August 30, 2007 by Joseph M. Wallin

Delaware Update on "Spring-Loaded" Options

On August 15, 2007, the Delaware Chancery Court, Chancellor Chandler, in a case called In Re Tyson Foods, Inc. Consolidated Shareholder Litigation,  refused to dismiss a complaint alleging breach of fiduciary duty for granting so-called "spring-loaded" stock options.

("Spring-loaded" stock options are options priced at fair market value on the date of grant, but granted immediately before or close in time before the release of good news, which can be expected to drive the price of the stock up, making the options more valuable.  "Bullet dodging" stock options, in contrast, are options granted at fair market value, but immediately after the release of bad news, after the market has marked down the value of the stock to take into account the bad news.)

Chancellor Chandler's recent decision reaffirms his earlier decision that under certain circumstances the grant of spring-loaded options can constitute the breach of fiduciary duty. 

The practical implication of this decision?  Boards should evaluate their stock option grant practices to make sure that they are above reproach in terms of their timing and pricing to avoid the arguments made in the Tyson case.  In the words of Chancellor Chandler:  "[I]f a board of directors candidly discloses why and when it awarded options, and accounted for them in a lawful manner consistent with the actual facts, the board has, absent unusual circumstances, insulated itself from fiduciary liability for misleading investors or regulatory authorities.  What the directors would remain subject to was a well-pled claim that the compensation awarded was actionably excessive because, for example, it involved self-dealing and was not fair to the corporation."

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Posted on August 14, 2007 by Joseph M. Wallin

SEC Issues Proposed Rules on Exemption of Employee Options under Section 12(g)

The SEC has issued proposed rules regarding the exemption of compensatory employee stock options from registration under Section 12(g) of the Securities Exchange Act of 1934.  

Under Exchange Act Section 12(g), an issuer with more than 500 holders of record of a class of securities and assets in excess of $10 million at the end of its most recent fiscal year must register that class of equity security (see SEC Release No. 34-37157 (May 1, 1996)), unless an exemption is available.  Stock options issued to employees are considered a separate class of security for this purpose.  There is currently no exemption available for employee stock options, and issuers with more than 500 optionees that meet the assets test instead have been relying on the SEC no-action action letter process.

The SEC has proposed an exemption from Exchange Act Section 12(g) registration for:  (i) private, non-reporting issuers for compensatory employee stock option options issued under employee stock option plans, and (ii) compensatory employee stock options of issuers that have registered under Exchange Act Section 12 the class of equity security underlying those options.

The proposal for private companies for compensatory employee stock options issued under stock option plans would be subject to the following conditions:

  • Eligibility Restriction--optionees could only include employees, directors, consultants, and advisors of the issuer;
  • Transferability Restrction--transaction of shares received on exercise would have to be restricted;
  • Information Delivery Requirement--risk and financial information would have to be provided to optionees and holders of shares received on exercise that is of the type that would be required under Rule 701 if securities sold on reliance on Rule 701 exceeded $5 million in a 12-month period;
  • if these conditions were met, the 500 holder threshhold for registration would be eliminated.

The proposal would extend to the options only, and not the class of securities underlying the options.
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