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The Stock Options Book

(Print Version)

17th Edition

by Alison Wright, Alisa J. Baker, and Pam Chernoff

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In recent years, the level of legal, accounting, and regulatory complexity associated with employee stock options has continued to grow. This book, written by attorneys Alisa Baker and Alison Wright, and writer and editor Pam Chernoff, CEP, presents a straightforward, comprehensive overview of both the big-picture issues and the technical details related to designing and implementing stock option plans and employee stock purchase plans. The book also looks at hot issues and provides illustrative exhibits, a glossary, a bibliography, and primary source materials, plus a seminal article by Corey Rosen on plan design.

The 17th edition includes updates and clarifications throughout the book. It is an indispensable guide for anyone involved with this field.

"Anyone involved with the design or administration of employee stock option programs, from the inexperienced stock plan administrator to the seasoned compensation professional, will appreciate this useful reference tool."
- Tim Sparks, President, Compensia, Inc.

"This book should be on the desk of every stock option professional."
- Robert H. (Buff) Miller, Cooley Godward Kronish LLP

Publication Details

Format: Perfect-bound book, 390 pages
Dimensions: 6 x 9 inches
Edition: 17th (March 2016)
Status: In stock

Contents

PDF of the book's comprehensive table of contents

Preface
Introduction
Part I: Overview of Stock Options and Related Plans
Chapter 1: The Basics of Stock Options
Chapter 2: Tax Treatment of Nonstatutory Stock Options
Chapter 3: Tax Treatment of Incentive Stock Options
Chapter 4: Plan Design and Administration
Chapter 5: Employee Stock Purchase Plans
Chapter 6: Trends in Equity Compensation: An Overview
Part II: Technical Issues
Chapter 7: Financing the Purchase of Stock Options
Chapter 8: Overview of Securities Law Issues
Chapter 9: Tax Law Compliance Issues
Chapter 10: Basic Accounting Issues
Chapter 11: Tax Treatment of Options on Death and Divorce
Chapter 12: Post-Termination Option Issues
Part III: Current Issues
Chapter 13: Legislative and Regulatory Initiatives Related to Stock Options: History and Status
Chapter 14: Option Backdating: Timing of Option Grants
Chapter 15: Cases Affecting Equity Compensation
Chapter 16: Transferable Options
Chapter 17: Reloads, Evergreens, Repricings, and Exchanges
Appendix 1: Designing a Broad-Based Stock Option Plan
Appendix 2: Primary Sources
Glossary
Bibliography
Index

Excerpts

From Chapter 3, "Tax Treatment of Incentive Stock Options" (footnotes omitted)

If an option is disqualified from ISO treatment by a modification or cancellation before the year in which it would have become exercisable, then it is not considered when calculating the $100,000 limit. But if the modification or cancellation happens any time in the year the option would have become exercisable, the option is counted for purposes of the limit for that year. Disqualifying dispositions, meaning those in which shares are sold before the statutory holding period has elapsed, do not prevent those options from being counted toward the $100,000 limit.

Acceleration of the vesting of an ISO does not disqualify the option, but accelerated options are counted toward the $100,000 limit in the year of acceleration. This can get tricky if a change of control trigger or performance trigger allows exercise if a change of control occurs before vesting or disallows exercise until a performance target is met. If there is such an acceleration provision, then options first exercisable during a calendar year pursuant to an acceleration clause do not affect the application of the $100,000 rule for options exercised before the acceleration provision was triggered. All of these prior options can be exercised, up to the $100,000 limit, even if the accelerated options are exercised in the same year. However, any options from the accelerated group that are in excess of $100,000 minus the fair market value at grant of the previously exercised options that year are disqualified as ISOs and must be treated as NSOs.

Note that Treas. Reg. 1.422-3(e) states that calculation of fair market value for these purposes may be made by any "reasonable method," including independent appraisals and valuation in accordance with the gift tax rules.

From Chapter 9, "Tax Law Compliance Issues" (footnotes omitted)

For option exercises and ESPP purchases after the start of 2011, the IRS requires brokers to furnish optionees with Form 1099-B reflecting the cost basis of the securities. Only the amount paid for the shares is stated on the form, a requirement that has the potential to lead to over-reporting or even double reporting on the part of plan participants. Prior to 2013, the amount reported could be increased by any amount the optionee had to include in income, which meant the holders of NSOs could receive forms reflecting their true cost basis in the shares. However, the final regulations issued in 2013 provide that only the exercise price of options or the purchase price of ESPP shares may be reported on Form 1099-B.

Participants in Section 423 ESPPs are particularly likely to be confused by the forms. The reporting requirement is triggered by the purchase of shares—before the amount that must be included in income is known. The ordinary income element of Section 423 plan shares is affected by drops in stock price after the purchase date and by the character of the disposition of shares.

The requirement for the new form was included in the Energy Improvement and Extension Act of 2008, and final rules were published in April 2013. Companies are well advised to communicate to employees the fact that the amount brokers are reporting to optionees is seldom the same as the taxable income that the optionees themselves must reflect on their taxes. Participants should be advised to carefully calculate their own tax basis for purposes of their individual tax returns and not rely upon cost basis reported on the Form 1099-B. Wherever possible, plan sponsors should remind participants that tax basis (as opposed to cost basis) includes exercise price plus any amounts included in ordinary income. Participants should also be encouraged to consult with their tax advisors prior to reporting capital gains (or losses) on ESPP stock.

From Chapter 16, "Reloads, Evergreens, Repricings, and Exchanges" (footnotes omitted)

Although publicly traded companies may have to seek shareholder approval to meet exchange listing requirements, no special shareholder approval requirements are connected with repricings for securities law purposes. However, the employer has many other obligations under the Exchange Act with respect to a repricing. First, any participation in the repricing by Section 16 insiders will be reportable events under Section 16(a). Second, any participation by a named executive officer must be discussed in the narrative accompanying the Summary Compensation table in the company's proxy statement. Third, in the early 21st century, the SEC focused on the application of the "tender offer rules" to employee repricings and exchange offers, reasoning that such exchanges (unlike normal option grants) require optionees to make individual investment decisions. Under the Exchange Act, an issuer making a tender offer must comply with a variety of complex substantive and procedural rules relating to nondiscrimination and disclosure with respect to the terms of the offer. Offers that are conducted for compensatory purposes are exempt from compliance with the nondiscrimination requirements of Rule 13e-4. An issuer may take advantage of the exemption if:
  • it is eligible to use Form S-8, the options subject to the exchange offer were issued under an employee benefit plan as defined in Rule 405 of the Exchange Act, and the securities offered in the exchange offer will be issued under such employee benefit plan;
  • the exchange offer is conducted for compensatory purposes;
  • the issuer discloses in the offer to purchase the essential features and significance of the exchange offer, including the risks that optionees should consider in deciding whether to accept the offer; and
  • it otherwise complies with Rule 13e-4.

However, the issuer must still satisfy a number of hurdles to effect a valid exchange offer, including providing certain financial materials to both employees and the SEC, making various SEC filings, holding analyst calls (where appropriate), and providing a withdrawal period of at least 20 business days to offerees.