Description

Attention CEPI students: Since 2020, the CEPI curriculum has been all-digital, and the CEPI provides you digital access to the books, including this, as part of the exam fee. You still can buy the printed books from us as a supplement to the free digital access you receive from the CEPI. See our CEPI information page.

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 24th edition (2024) includes updates to chapters 6, 8, 9, 10, and 15.

"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

Product Details

Perfect-bound book, 404 pages
6 x 6 inches
24th (January 2024)
In stock

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: Cases Affecting Equity Compensation
Chapter 15: Transferable Options
Chapter 16. Evergreens, Repricings, Exchanges, and Reloads
Appendix 1: Designing a Broad-Based Stock Option Plan
Appendix 2: Primary Sources
Glossary
Bibliography

Excerpts

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

If an ISO is modified only with respect to a portion of the optioned shares, or if the modification is solely for the purpose of increasing the number of shares under option, only the portion of the ISO relating to such shares will be deemed modified for these purposes. The affected options will be considered to be newly granted options. If a company inadvertently modifies its ISOs, it can undo the modification without disqualifying the option as long as the modification is reversed by the earlier of the last day of the calendar year when the change was made or the date of exercise of the option.

If an ISO exercisable at $1 per share is amended at a time when the underlying stock has a value of $5 per share, the option exercise price will have to be increased to at least $5 per share to maintain the ISO status of the option. If the exercise price is not adjusted, the option will be treated as a discounted NSO that is subject to retroactive taxes and penalties under Section 409A from the original grant date. Taxes and penalties under Section 409A are due in the year the option vests. Even if the stock price has dropped, the modification may raise Section 409A issues, as discussed in section 9.5.3.

Under the ISO rules, if an ISO is modified, the grant date is deemed to be the date of the modification rather than the date of the original grant. This will mean that the optionee’s statutory holding period must be extended for an additional two years. Note that even if the modification occurs in a down market without repricing (because the exercise price is greater than current fair market value), the statutory holding period will re-start on the date of the modification.

A change in option terms by virtue of a “corporate transaction” will not be treated as a modification for these purposes. “Corporate transactions” include mergers, consolidations, reorganizations, and liquidations; changes in the corporate name; and other changes as may be prescribed by the Internal Revenue commissioner. Stock splits and stock dividends are not modifications so long as they are proportionate and do not result in more than minor changes to the value of the awards. For example, if a company conducts a 2-for-1 stock split in which every share become two shares, each of which is worth half of the pre-split share price, then outstanding option grants could be adjusted accordingly—the size of each outstanding grant could double and the exercise price could be halved without jeopardizing the ISO treatment or requiring remeasurement of the $100,000 limit.

From Chapter 6, "Trends in Equity Compensation: An Overview" (footnotes omitted)

In this context, a clawback is a contractual or statutory right to recover realized equity compensation upon the occurrence of certain events. The Sarbanes-Oxley Act of 2002 authorizes SEC enforcement of forfeiture of compensation by the CEO and CFO in the event of certain securities law violations (e.g., those giving rise to financial restatements, such as backdating). The Dodd-Frank Act included a provision requiring companies to adopt written clawback policies that set forth their authority to claw back compensation. In late October 2022, the SEC finalized clawback rules, and the national securities exchanges subsequently issued listing standards that were implemented in 2023. The new rules set forth when compensation must be clawed back and who it must be clawed back from.

Under the rules, current and former Section 16 officers are subject to clawback of their incentive compensation when grant or vesting is based on stock price or other financial reporting metrics. This includes performance-vested equity compensation received in the three years leading up to a restatement that results from noncompliance with SEC rules. The error can be either a material error or one that would become material if not corrected.

Because the Dodd-Frank Act does not require that compensation be clawed back solely from those who were involved in the financial misstatements, it potentially has a much broader application than the earlier Sarbanes-Oxley provision. In 2016, the Ninth Circuit Court of Appeals took a broader view of the clawback provisions of the Sarbanes-Oxley Act when it upheld the SEC’s argument that Sarbanes-Oxley allows clawbacks from CEOs and CFOs who have certified false and misleading financial statements that are later restated—even if the restatement was not caused by the misconduct of the CEO or CFO.

The SEC rules, as well as the rules adopted by the national securities exchanges, require companies to adopt and disclose policies for clawing back incentive compensation from current and former executive (Section 16) officers when material noncompliance with financial reporting requirements leads to financial restatements. The amounts to be clawed back include incentive compensation tied to accounting-related metrics, stock price, or total shareholder return (TSR). Clawbacks are not limited to those who participated in the actions that led to the restatement. The recoverable amount is the amount of incentive-based compensation received that is in excess of the amount that would otherwise have been received if calculated based on the restated metric.

The clawback provisions must apply to incentive compensation received in the three years preceding the date on which the company is required to prepare the restatement.

Under the rules, companies are required to file their clawback policies as exhibits to their annual reports. They are also required to disclose in their annual reports and in any proxy statement that requires executive compensation disclosures whether a restatement requiring recovery of incentive-based compensation was completed during that fiscal year as well as the existence of any outstanding balance of excess incentive-based compensation from a prior restatement.

The rule applies to listed companies, including emerging growth companies, smaller reporting companies, and foreign private issuers. Listed companies that fail to adopt and disclose clawback policies will be subject to delisting.