NASPP Webcast Presentation The New Cashless Exercise: Stock-Settled SARs

Transcription

1 The New Cashless Exercise: Stock-Settled SARs Art Meyers Seyfarth Shaw LLP Danyle Anderson Tech Data Corporation Valerie Steffen Duke Realty Corporation

2 Introduction What is a Stock-Settled SAR ( SSAR )? Contractual right to receive upon exercise of the award the post-grant appreciation on the number of shares subject to the award in the form of shares Economically similar to a non-qualified stock option, but without the need to pay the exercise price Slide 2

3 Introduction Compare with other methods of exercising stock options without cash Sell-to-cover Same day sale Pyramid exercise Net exercise (or immaculate exercise ) Stock-for-stock exercise (or share swap exercise ) Slide 3

4 Introduction Why might companies consider switching from options to SSARs? Accounting treatment now on par with stock options May allow company to use fewer shares May help reduce need for stock buy back programs Potential solution to Sarbanes-Oxley prohibited loan concerns with cashless exercises Slide 4

5 Introduction Example: Employee 1 granted 100 stock options with an exercise price of $20 per share Employee 2 granted 100 SSARs with an exercise price of $20 per share At exercise, shares worth $25 each Employee 1 sells all 100 shares in a cashless exercise. 80 shares sold to pay the aggregate exercise price of $2,000. The remaining 20 shares sold for $500. Employee 2 exercises SSAR, pays $0, and sells the resulting 20 shares for $500 Option results in 100 shares being sold, the SSAR in just 20 shares being sold Slide 5

6 Introduction Disadvantages As with stock options, company s stock price must increase after grant for holder to realize a benefit SSARs do not generate any cash flow to the company Slide 6

7 Introduction Better to use pyramid or net exercise options? Perhaps Questions over liability award status appears resolved in favor of accounting under FAS123R Characterization as deferred compensation under 409A? Slide 7

8 Taxation of SSARs No tax at grant Spread at exercise taxed as ordinary income Employee subject to tax withholding at exercise Employer tax reporting obligations FICA tax obligation arises at exercise Slide 8

9 Taxation of SSARs Capped SSARs may be taxed before exercise Capped SSAR concept Realize income on earlier of date cash is paid (or shares are transferred), or date award is exercisable and appreciation ceiling reached 10b5-1 trading program could help Internal Revenue Code Sections 162(m) and 280G apply Slide 9

10 Design Considerations Does plan document permit the grant of SSARs? Otherwise, design considerations are generally the same as stock options Clean-up any cash SAR or tandem SAR language Carefully review plan s share counting language Develop new SSAR grant agreement forms File a copy of SSAR grant agreement form as an exhibit Slide 10

11 33 Act Registration Form S-8 available for SSARs Rule 144 may be easier to satisfy No sale doctrine possibly available Slide 11

12 Section 16 Grant of SSAR SSAR is a derivative security Report grant of SSAR on Table II of Form 4 (similar to a stock option) Exempt from 16(b) liability if approved by board of directors or compensation committee Vesting of SSAR Similar to option; nothing to report Slide 12

13 Section 16 Exercise of SSAR Treated as simultaneous purchase of the number of shares underlying the SSAR at exercise price and a sale back to issuer of number of shares at market price on date of exercise equal to the aggregate exercise price Various 16(b) exemptions should apply Slide 13

14 Proxy Issues Stock Ownership Table Compensation Committee Report Compensation of Directors Summary Compensation Table Options Grant Table Option Exercise and FYE Value Table Repricing Table Equity Compensation Plan Table Submitting plans for shareholder action Slide 14

15 Converting Existing Stock Options to SSARs Use extreme caution Check for prohibitions in the plan on repricing without shareholder approval Determine whether participant consent is required Consider whether exchange listing requirements necessitate shareholder approval Slide 15

16 Converting Existing Stock Options to SSARs Are tender offer rules triggered? Section 16 considerations Conversion could be a material amendment which is deemed a cancelation and regrant IRC Section 409A issues Modifications of options can cause an option to be subject to 409A Slide 16

17 Converting Existing Stock Options to SSARs IRC Section 409A (cont.) Proposed regulations define modification to include reduction in the exercise price On the other hand, the proposed regulations state that the addition of a share-swap exercise feature is not a modification Slide 17

18 Miscellaneous R10b5-1 plans available for SSARs Institutional investor reaction? Valuation models should be unaffected But, ISS proxy voting guidelines on liberal share counting provisions could pose problems for new plans and for amendments that require shareholder approval Revise employee communications Explore third party administrator / broker issues in advance Slide 18

19 Questions Arthur S. Meyers Seyfarth Shaw LLP Two Seaport Lane Suite 300 Boston, MA Slide 19