Executive Stock Options and Stock Appreciation Rights

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Herbert Kraus

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Don't even consider preparing a stock option plan for your company or clients without this unique one-volume reference book. Executive Stock Options and Stock Appreciation Rights will guide you through such vital topics as: types of stock options available, including nonqualified and incentive stock options; stock appreciation rights; SEC disclosure and registration requirements; liabilities under Section 16(b) and Rule 16b-3; stock option repricing; Section 423 stock purchase plans; federal tax law including Section 409A; state corporation and blue sky laws; accounting practice under revised Statement of Financial Accounting Standards No. 123; timing of stock option grants; requirements of the stock exchanges; IRS rulings affecting gifts of compensatory stock options; self-repricing “look-back” options; federal tax implications of dividing employee stock options in marital property settlements; and granting of stock options to dual or “leased” employees.

You'll learn about the advantages and disadvantages for both the company and the optionee. Plus, you'll find numerous sample forms and documents, including stock option plans for public and closely held companies, proxy statements, and submissions to stockholders disclosing existing stock option arrangements.

Book #00628; looseleaf, one volume, 730 pages; published in 1994, updated as needed; no additional charge for updates during your subscription. Looseleaf print subscribers receive supplements. The online edition is updated automatically. ISBN: 978-1-58852-065-4.

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  • Availability: Available
  • Brand: Law Journal Press
  • Product Type: Books
  • Edition: 0
  • Page Count: 730
  • ISBN: 978-1-58852-065-4
  • Pub#/SKU#: 628
  • Volume(s): 1

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  • Herbert Kraus
Herbert Kraus is a retired former partner of Gibson, Dunn & Crutcher LLP, Los Angeles, California, and has practiced corporate and securities law with that firm throughout his professional career. He is a graduate of Stanford University (A.B. 1952) and the Stanford Law School (LL.B. 1955), where he was Order of the Coif. Mr. Kraus served as Chairman of the Business and Corporation Law Section of the Los Angeles County Bar Association from 1971 to 1972, as Chairman of the Committee on Partnerships and Unincorporated Associations from 1983 to 1984, and as Chairman of the Executive Committee of the Business Law Section of the California Bar form 1986 to 1987. He is a contributing author to Start-Up and Emerging Companies (Law Journal Press, 1985). Mr. Kraus is also the author of The California Corporation: Legal Aspects of Organization and Operation (Bureau if National Affairs, 1993).


§ 1.01 Introduction
§ 1.02 Conflicts of Interest
§ 1.03 Employee Stock Options: General Concepts
[1] Elements and Terminology of Stock Options
[2] Compensatory Stock Options Distinguished from Other Stock Options
[3] Section 423 Stock Options
[4] Stock Option Plans
[5] Stock Option Agreements
[6] Directors’ Stock Options
§ 1.04 Stock Appreciation Rights
§ 1.05 Considerations Affecting Executive Stock Options and SARs from the Employee’s Standpoint
[1] The Place of Stock Options in the Compensation Package
[2] Impact of Tax and Securities Laws
[3] Incentive Stock Options
[4] Payment of the Option Exercise Price
[5] Survival of Options
§ 1.06 Considerations Affecting Executive Stock Options and SARs from the Employer’s Standpoint
[1] Stock Options: Compensation Without Cost
[2] Accounting Issues
[3] Tax Treatment
[4] Impact of Securities Laws
[5] Stock Appreciation Rights
[6] Effects on Long-Range Planning
§ 1.07 Stock Option Consequences of Stock Market Price Declines

Issues Under State General Corporation Law

§ 2.01 Statutory Provisions Governing Stock Option Plans and Agreements
[1] The Corporation’s Power to Grant Stock Options
[2] Stock Options and Preemptive Rights
[3] Sufficiency of Authorized Capital to Cover Optioned Shares
[4] Poison Pill Provisions in Stock Options
[5] Required Contents of Stock Option Agreements
§ 2.02 Receipt of Consideration for Stock Options
[1] Statutory Consideration Requirements
[2] Stock Options Granted in Consideration for Services Rendered: Status as Marital Property
§ 2.03 Statutory Consideration for the Issuance of Stock on Exercise of Stock Options
[1] Payment of Exercise Price in Services Rendered
[2] Payment of Exercise Price by Promissory Note
[3] Payment of Exercise Price by Delivery of Previously Owned Shares
[4] The Immaculate Exercise
[5] Consideration for Sale of Treasury Shares
[6] Payment of Exercise Price Through a Stockbroker
§ 2.04 Statutory Consideration for the Issuance of Stock on Exercise of SARs
[1] The Surrendered Option as Consideration
[2] Cancellation of Debt as Consideration
§ 2.05 Financial Assistance to Executive Exercising Stock Options
[1] Payment for Stock with Promissory Note
[2] Corporate Loan Independent from Sale of Stock
§ 2.06 Board of Directors’ Proceedings
[1] Necessity for Board Action
[2] Directors’ Standards of Conduct
[3] Directors’ Conflicts of Interest
[4] Resolutions and Minutes
§ 2.07 Stockholder Approval and Disclosure Requirements
§ 2.08 Repricing Stock Options That Are Out-of-the-Money
[1] Stock Option Plan Provisions Affecting Repricing
[2] State Corporation Laws Affecting Repricing
[3] Automatic Repricing with Look-Back Options
[4] Repricing with Stock Appreciation Guarantees
§ 2.09 Stock Option Valuation Issues
[1] Valuing Stock Options as Marital Property
[2] Valuing Stock Options as a Source of Support Obligations

Tax Issues

§ 3.01 Non-Qualified Compensatory Stock Options
[1] Why Non-Qualified Options May Be Preferable to ISOs
[2] The Employee’s Tax Considerations
[3] The Employer’s Tax Considerations
§ 3.02 Incentive Stock Options
[1] The Employee’s Tax Considerations
[2] The Employer’s Tax Considerations
[3] Requirements for Incentive Stock Options
[4] Adjustments in ISOs Upon Reorganizations
[5] Repricing Out-of-the-Money ISOs
§ 3.03 Tax Treatment of Stock Appreciation Rights
§ 3.04 Application of Restricted Property Concepts
[1] Deferring Tax with Restricted Stock
[2] Reducing Tax with Restricted Stock
[3] Employer’s Deductions
§ 3.05 Disallowance of Deductions for Employee Remuneration in Excess of $1,000,000
[1] Application of the Limitation
[2] Exclusion for Performance-Based Compensation
§ 3.06 Effect of Golden Parachute Penalties on Change in Control Provisions of Options and SARs
[1] Parachute Payments
[2] Excess Parachute Payments
§ 3.07 Employee Stock Purchase Plans Under IRC Section 423
[1] Requirements for Section 423 Tax Treatment
[2] The Employee’s Tax Treatment
[3] The Employer’s Tax Treatment

Accounting Issues for the Employer

§ 4.01 Compensation Expense Charges for Stock Options
[1] Compensatory Stock Options Under APB25
[2] Compensatory Stock Options Under the Codefied Standards
§ 4.02 Compensation Expense Charges for Stock Appreciation Rights
[1] SARs under APB25
[2] SARs under the Codefied Standards
§ 4.03 Effect of Stock Options and SARs on Earnings Per Share
[1] Basic Earnings Per Share
[2] Diluted Earnings Per Share
§ 4.04 Accounting for Stock Options in Business Combinations

State Blue Sky Law Issues

§ 5.01 Application of State Blue Sky Laws to Stock Options
[1] Federal Preemption
[2] Securities
[3] Which Laws Will Apply
[4] Foreign Employees
§ 5.02 Available Blue Sky Exemptions
[1] Distinguishing Between the Option Grant and the Exercise
[2] Exemptions for Grants of Options Under Employee Plans
[3] Exemptions for Exercise of Options
§ 5.03 Registration or Qualification
§ 5.04 Registration of Broker-Dealers and Agents
§ 5.05 Blue Sky Limitations on Options, Etc.

Federal Securities Law Issues

§ 6.01 Federal Securities Act
[1] In General
[2] Non-Public Offering Exemption from Registration
[3] Regulation D Exemption from Registration
[4] Rule 701 Exemption from Registration for Non-Reporting Issuers
[5] Intrastate Offering Exemption from Registration
[6] Registration on Form S-8
[7] Resales of Securities Registered on Form S-8
[8] Registration on Form S-3
§ 6.02 Federal Disclosure Requirements for Options and SARs
[1] Annual Compensation Plan Disclosures
[2] Submissions of Plans to Stockholders
[3] Annual Compensation Disclosures
§ 6.03 Section 16 Issues Affecting Options and SARs
[1] Persons Subject to Section 16
[2] Reporting Under Section 16(a)
[3] Stock Options and SARs as Equity and Derivative Securities Under Section 16
[4] Rule 16b-3
§ 6.04 Requirements of National Market SROs
[1] Corporate Governance Requirements
[2] Listing Procedures
§ 6.05 Margin Rules
[1] Financial Assistance to the Optionee by the Issuer
[2] Brokered Option Exercises
§ 6.06 Insider Trading Issues
§ 6.07 Self-Tender Regulation
[1] Option Repricing Offers
[2] Option Repurchase Offers
§ 6.08 Corporate Reform Laws Affecting Stock Options
[1] Acceleration of Form 4 Filings
[2] Profit Disgorgement Following Certain Accounting Restatements
[3] Prohibited Transactions During Black-Out Periods
[4] Prohibited Loans
§ 6.09 Registration of Stock Options Under the Exchange Act
[1] Consequences of Exchange Act Registration
[2] Exemptions from Exchange Act Registration

Federal Labor Law Issues

§ 6A.01 Employee Retirement Income Security Act
§ 6A.02 Fair Labor Standards Act
§ 6A.03 Considering Stock Option Income in the Determination of What Constitutes Compensation
§ 6A.04 Stock Options of Federally Supervised Enterprises

Provisions in Stock Option Plans

§ 7.01 General
§ 7.02 How Detailed Should the Stock Option Plan Be?
§ 7.03 Plan Objectives
§ 7.04 Eligible Employees
§ 7.05 Amount and Type of Securities Optioned
[1] Type of Securities Optioned
[2] Amount of Securities Optioned
[3] Limitations on Options to a Participant
§ 7.06 Anti-Dilution Provisions
[1] Adjustments for Modifications in the Optioned Stock Itself
[2] Adjustments for Stock Dividends
[3] Adjustments for Reorganizations and Recapitalizations
[4] Adjustments for Spin-Offs
§ 7.07 Exercise Price
[1] Minimum Exercise Price
[2] Exercise Price Determined by Stock Market Values
§ 7.08 Duration of Plan
§ 7.09 Inclusion of Stock Appreciation Rights
[1] Tandem SARs
[2] Stand-Alone SARs
§ 7.10 Inclusion of Dividend Equivalent Rights
§ 7.11 Administration of the Plan
§ 7.12 Amendments of the Plan

Provisions in Stock Option Agreements

§ 8.01 Negotiated Stock Options
[1] Differences Between Negotiated Stock Options and Options Granted Under a Plan
[2] Provisions Unique to Negotiated Option Contracts
§ 8.02 Duration of Option or SAR
[1] In General
[2] Effect of Death, Disability, Retirement, Employment Termination
§ 8.03 Transferability of Options or SARs
[1] In General
[2] Estate Planning Considerations
[3] Effect of Divorce
§ 8.04 Survival of Options and SARs in Reorganizations
[1] From the Employee’s Standpoint
[2] From the Employer’s Standpoint
§ 8.05 The Exercise Price and Its Adjustments
[1] Exercise Price
[2] Anti-Dilution Adjustment Provisions
§ 8.06 Change in Control Provisions
§ 8.07 Exercisability of Options; Installments
§ 8.08 Methods of Exercising Stock Options
[1] In General
[2] With Previously Owned Stock
[3] Constructive Exchange
[4] Brokered Exercise Under Regulation T
[5] Immaculate Exercise
[6] Reload Options
§ 8.09 Complying with Tax Withholding Requirements
[1] Awards That Are Not ISOs
[2] Incentive Stock Options
§ 8.10 Tandem Stock Appreciation Rights
§ 8.11 Performance Options
[1] Performance Conditions Affecting the Time of Exercise
[2] Performance Conditions Affecting the Number of Shares
[3] Performance Conditions Affecting the Exercise Price
§ 8.12 Contractual Restrictions Affecting Optioned Stock
§ 8.13 Protections Against Market Price Declines
[1] Stock Appreciation Guarantees
[2] Collaring an Appreciated Market Price of Optioned Stock
§ 8.14 General Contract Clauses
[1] Provisions Unique to Stock Options and SARs
[2] General Contract Provisions

Stock Options for Non-Employee Directors

§ 9.01 The Use and Function of Director Stock Options
[1] Converting Directors’ Fees Into Stock Options
[2] Grant of Stock Options in Addition to Directors’ Fees
[3] Other Features of Directors’ Options
§ 9.02 Options for Outside Directors Under State Laws
[1] State General Corporation Laws
[2] State Blue Sky Laws
§ 9.03 Options for Outside Directors Under the Securities Act of 1933
[1] Compensation Plans for Directors Treated the Same as Such Plans for Employees
[2] Registration of Optioned Stock
[3] Resales of Optioned Stock
§ 9.04 Rule 16b-3 Considerations Affecting Stock Option Plans for Non-Employee Directors
[1] Necessity for Rule 16b-3 Compliance
[2] Rule 16b-3 Exemptions for the Grant of Non-Employee Directors’ Options
[3] Rule 16b-3 Exemptions for Subsequent Transactions Under Non-Employee Directors’ Options
[4] Exemption for Receipt of Options Acquired Pursuant to an Election
§ 9.05 Federal Disclosure Requirements Regarding Directors’ Stock Options
[1] Submissions of Plans to Stockholders
[2] Annual Compensation Disclosures

Sample Plans and Agreements

§ 10.01 Employees’ Stock Option Plan for a Private Company
§ 10.02 Employees’ Stock Option Plans for Public Companies
[1] Incentive Stock Option Plan
[2] Incentive and Non-Qualified Stock Option Plan
[3] Omnibus Equity Award Plan
§ 10.03 Stock Option Plan for Non-Employee Directors
§ 10.04 Stock Option Contract Under an Option Plan
§ 10.05 Stock Purchase Plan Under IRC Section 423

Sample Proxy Statements Soliciting Stockholder Approvals

§ 11.01 Proxy Statement Submissions of Employees’ Stock Option Plans
[1] Submission of Incentive Stock Option Plan
[2] Submission of Incentive and Non-Qualified Stock Option Plan
[3] Submission of Omnibus Equity Award Plan
§ 11.02 Proxy Statement Submission of a Non-Employee Directors Plan
§ 11.03 Proxy Statement Submission of a Plan Amendment to Satisfy Internal Revenue Code Section 162(m)
§ 11.04 Proxy Statement Submission of an Option Repricing Program
§ 11.05 Proxy Statement Submission of a Section 423 Employee Stock Purchase Plan

Sample Disclosures of Executive Compensation That Includes Stock Options

§ 12.01 Proxy Statement of an Industrial Company
§ 12.02 Proxy Statement of a Financial Services Company
§ 12.03 Description of Stock-Based Compensation in Note to Financial Statements

Stockholders’ Attitudes Toward Stock Options

§ 13.01 Views of Institutional Investors
[1] Institutional Investors’ Views Regarding the Qualitative Features of Stock Option Plans
[2] Institutional Investors’ Analyses of the Quantitative Features of Stock Option Plans
[3] Institutional Investors’ Views Regarding Stock Option Repricing Arrangements
§ 13.02 Proxy Statement Presentations of Stockholder Proposals Concerning Stock Options
[1] Options Criticized as Ineffective Incentives
[2] Options Criticized as Dilutive
[3] Options Criticized for Failing to Retain Employees
[4] Proposal That Stock Option Grants Should Be Performance-Based