The NASPP Blog

March 31, 2009

Proposals for Option Exchange Programs

Last week, Nasdaq filed with the SEC to extend its suspension of the minimum stock price listing requirement. Under this requirement, companies that do not have a closing price of at least $1 for more than 30 days can be delisted. But, at least until June 30, 2009, the requirement won’t apply. See our January 29 2009 blog for more information on this requirement and the delisting process.

While I’m on the topic of depressed stock prices, I thought I’d highlight a few notable recent shareholder proposals for option exchange programs.

eBay’s Option Exchange Program

Under eBay’s program, underwater options would be exchanged for RSUs. Far from a one-for-one exchange or even a value-for-value exchange, participants would receive only 90% of the current value of their underwater options in RSUs. This results in some pretty steep exchange ratios–eBay estimates as high as 35 options for one RSU for some grants–and possibly some pretty small RSUs grants. Grants of less than 100 shares will be paid out in cash.

Shares cancelled in the underwater options will NOT be available for regrant under eBay’s plan. As a result, the whole program is also contingent on eBay shareholders approving an additional allocation of shares for eBay’s 2008 plan.

Starbucks Program

Starbucks has received shareholder approval for a fairly straight-forward, reasonably shareholder friendly option exchange program. There’s nothing terribly remarkable about the program–either good or bad. It will be a value-for-value exchange of options for options. Interestingly, Starbucks had to agree to amend the plan’s share counting language relating to shares tendered to cover tax withholding (but not for options surrendered in the exchange–those shares will return to the plan), to get RiskMetrics to recommend that investors vote in favor of the proposal.

Intel’s Program

Just like Starbucks, Intel’s program will be a value-for-value exchange of options for options. Despite the fact that Intel is aiming for value-for-value in new option grants, some of its options are so far underwater that Intel estimates the exchange rate for them could be 99.6 to 1! 

Just as with ebay’s program, shares underlying the surrendered options generally will not be available for future grants, so Intel is asking for an additional allocation of shares.

Features Common to All Three Programs

  • For all three companies, a majority of their options are underwater.  Intel reports that 99% of its options are underwater and eBay reports 96%.  Comparatively, Starbucks maybe could have waited it out a bit, with only 62% of their options underwater. 
  • All three programs exclude both NEO’s and directors.  Starbucks goes even further to exclude additional members of their “senior leadership team.”
  • All three companies are essentially asking shareholders to pre-approve the program and then giving themselves a specified period in which to implement it: eBay has 12 months, Starbucks has six months, and Intel splits the difference with nine months.    
  • In all three programs, only options with a price above the 52-week high are eligible for exchange.  eBay and Intel exclude grants made in the past year and Starbucks excludes grants made in the past 17 months (which seems like an odd number–no idea how Starbucks arrived at it).  eBay also excludes options that will be expiring within 12 months.     
  • All three programs also restart vesting, with no portion of the new awards vesting for at least one year. Starbucks and Intel keep things simple by using the same vesting schedule for all new awards; eBay assigns different schedules based on when the surrendered options were originally scheduled to vest.  Starbucks and Intel will reduce the contractual term of the options to seven years.
  • All three companies state that reducing overhang is one of the benefits of the program. But, my understanding of the term “overhang” is that it includes any shares available for grant under the plan (e.g., overhang = shares available for grant + shares outstanding).  So, I’m not sure how Starbucks program will reduce their overhang.  Since the eBay and Intel programs don’t add shares back to the plan, their programs will reduce overhang under the traditional definition.    

Reason #19 to Renew Your NASPP Membership: “Half-Off” the NASPP Annual Conference!
I’m thrilled to announce that the 17th Annual NASPP Conference will be in San Francisco, from November 9-12.  I’m even more excited to announce that we are offering a special “half-off” rate on the Conference for members that register by April 24. We know that many of our members are struggling financially but, with all the regulatory changes the current economic environment is bringing about, are also in critical need of the practical guidance delivered at the Conference. As a thank you to our members and to ensure that they are able to attend this year, members that register by April 24 pay only $795 per person, half the standard member rate of $1,595 (which we did not increase this year). It’s been a long time since the NASPP Conference was available at this price and I don’t expect that we’ll offer it again. Register today at Naspp.com.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blogs. 

– Barbara