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 14th edition, most of the text in terms of page count (chapters 1, 2, 3, 4, and 9, plus the glossary) has been revised and expanded to bring it up to date as of late 2016.
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
Handling Death Under an Equity Compensation Plan
Evergreen Provisions for Stock 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
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 11, "Preparing for an Initial Public Offering"
The company may want to consider adopting a separate stock plan for the members of its board of directors. While it is quite common to grant stock options or other full-value share awards (such as restricted stock and restricted stock unit awards) to nonemployee directors out of the company's primary stock incentive plan while the company is closely held, separate arrangements are often implemented after an IPO.
Historically, such plans were "formula" plans under which eligibility was limited to nonemployee directors; the plan, by its terms, specified the amount, price, and timing of option grants or other awards; and the company's ability to amend these plan provisions more than once every six months was limited. These "formula" plans played an important role in ensuring that a company could provide stock options and awards to its nonemployee directors without jeopardizing their "disinterested" status for purposes of administering the company's discretionary stock incentive plans. Under current SEC rules, "disinterested" status is no longer needed to ensure that grants or awards to officers and employee-directors under a company's discretionary stock incentive plans are exempt from the "short-swing profits" recovery provisions of Section 16(b) of the Exchange Act. Just the same, some companies continue to use "formula" plans as a way of minimizing conflict-of-interest issues that might arise where nonemployee directors are both administrators and beneficiaries of the companies' stock option program. This has become particularly important in recent years where some shareholders have challenged the equity awards granted to nonemployee directors on a discretionary basis by a subcommittee of the board of directors, alleging that the directors were paying themselves excessive compensation. In fact, in the past few years, where equity awards are granted to directors on a discretionary basis (either through a separate employee stock plan or the general employee stock incentive plan), it is becoming more common for companies to attempt to minimize the risk of litigation over "excessive compensation" by adding a "meaningful" limit on the aggregate number of shares of stock that may be granted to an individual director in any one year to the plan.