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Our standard introductory guide for company owners, managers, and advisors is The Stock Options Book, which covers a multitude of issues relating to stock options and stock purchase plans. This book goes a step beyond The Stock Options Book with extensive information on particular issues such as securities laws. (Many people get both books; for example, the Certified Equity Professional Institute has adopted both as texts for all three levels of its program.) The book addresses administration, state securities laws, federal securities laws, preparing for an IPO, handling death under a stock option plan, stock options and divorce, evergreen provisions, underwater options and repricing, designing and implementing an employee stock purchase plan (ESPP), the role of the transfer agent, annual meetings, and plan design and communication issues. A lengthy glossary and an index round out the book.
In the sixteenth edition, the old chapter 4 on IPOs has now been rewritten and separated into two chapters, 4 and 5; a new chapter on equity in M&A (chapter 6) has been added; the chapter on ESPPs (now chapter 11) has been rewritten and expanded; and chapters 1, 2, 7 (the chapter on issues in death, formerly chapter 5), and 8 (the chapter on evergreen provisions, formerly chapter 6), plus the glossary, received minor edits.
Table of Contents
Administering an Employee Stock Option Plan
Federal Securities Law Considerations for Equity Compensation Plans
State Securities Law Considerations for Equity Compensation Plans
Preparing for an Initial Public Offering
Executive and Equity Compensation Considerations After an IPO
Equity Considerations in Merger and Acquisition Transactions
Handling Death Under an Equity Compensation Plan
Evergreen Provisions for Equity Compensation Plans
Repricing Underwater Stock Options
Equity Awards in Divorce
Designing and Implementing an Employee Stock Purchase Plan
The Role of the Transfer Agent
Plan Design and Communications Issues
A Layperson's Glossary of Employee Stock Plan Terminology
About the Authors
About the NCEO
From Chapter 1, "Administering an Employee Stock Option Plan"
In view of the high degree of investor interest in responsible oversight of the timing of stock option grants, a company should document the entire internal approval process, including the grant date, the number of shares subject to the award, the option exercise price, and the identity of the intended recipient. The company also should consider documenting the identities of the persons who authorized the award, and the related authorization date. This authorization should be reflected in the board or committee meeting minutes or in a written consent in lieu of a meeting. To the extent that the board of directors delegates responsibility for option grants to an executive officer (or group of executive officers), there should be restrictions on the scope of this authority (for example, limits on the size of awards and/or permissible recipients). In addition, the board of directors should regularly audit the activities resulting from this delegated responsibility to ensure that this authority is not being misused. In the event that an employee is inadvertently left off of the list of recommendations for a stock option grant, the company should have a policy in place for how this situation will be handled. Depending upon the particular facts and circumstances, the remedy may involve simply adding the individual’s name to the grant list or placing the individual on the subsequent list to be submitted for board or committee approval.
To comply with Section 404 of the Sarbanes-Oxley Act of 2002 (see section 1.6 of this chapter for more information), companies should ensure their internal control system covers administration of their employee stock option plan, from the initiation of the grant through final approval of the company’s board of directors or appropriate board committee. In establishing the internal approval process, it is imperative that the company segregate the required duties appropriately to ensure that the individuals who gather and formulate the information that is presented to the board of directors or board committee are not the same individuals who record the approved awards. The principal areas that should be incorporated in the control system include both grant procedures and the reporting of grants and awards within the company, particularly with respect to interdepartmental communications. Finally, these procedures should be routinely evaluated and tested to ensure they contain no material deficiencies.
In addition, care should be taken when administering an employee stock option plan where the board of directors has delegated stock option grant approval to a subcommittee to ensure that grants conform to the guidelines that have been established with respect to the subcommittee’s scope of authority. Frequently, the charter of the subcommittee will state that the subcommittee may approve awards only to certain groups of employees within specified ranges of value. It is imperative that any audit of grant procedures verify that these guidelines are followed precisely. If grants have been processed that did not follow the specified guidelines, then the grants are not valid.
From Chapter 6, "Equity Considerations in Merger and Acquisition Transactions"
Once due diligence is complete, the transaction enters the pre-close stage. At this point, the announcement of the purchase/merger agreement is disclosed to the public as well as to the buyer and seller’s employees. The buyer and seller obtain all necessary consents and approvals from the board, shareholders, and governmental entities. Final due diligence is completed with full disclosure and access to the seller’s data. If the buyer requires funding to complete the transaction, money may be raised at this time.
At this point, the buyer and seller also commence employee retention planning. The degree to which the seller is involved will depend on the buyer’s preference and the perceived level of power and control the buyer exerts over the planning. Nevertheless, the business objectives should always be the same: retention of executive and non-executive key employees, elimination of duplicate positions/functions, and relocation of employees/jobs to maximize efficiency.
If the equity plan administrator has not previously been aware of the potential transaction, they are informed during the pre-close period. Due diligence may have been conducted by individuals not familiar with equity and the administration thereof during the previous phase. If so, it would behoove the equity plan administrator to conduct their own review of the documents as soon as possible.
Ideally, planning for the close and post-close integration of employees occurs during this stage. On both the buyer and seller side, equity plan administrators and a cross-functional team consisting of members of the legal, human resources, and accounting departments should meet regularly to discuss questions about the resources needed to complete the transaction, impact of the transaction on outstanding awards, and post-close integration of the employees and their awards.