Recognizing that
compensatory benefit plans are important in increasing shareholder value and
motivating valued employees, the
corporations commissioner has amended the compensatory plan regulations under
the California Corporate Securities Law of 1968. These amendments, which went
into effect on July 9, 2007, eliminate many of the regulations’ confusing requirements.
They also provide more flexibility to privately held corporations and limited
liability companies when drafting stock options, stock purchase plans, or other
compensatory benefit plans. Here, we break down what employers need to know
about the amendments.
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The Amendments
In a nutshell, the
amended regulations do the following:
• Expand the list of
people eligible to participate under an option plan or purchase plan to include
the same people who are also exempt under the federal rule (Rule 701 of the
Securities Act of 1933), such as officers, general partners, trustees (in a
case in which the issuer is a business trust), and advisors, as well as
insurance agents who are employees.
• Eliminate the
requirement that an option’s exercise price or a share’s purchase price must be
at least 85 percent of the fair value at the time the option or share is
granted.
• Eliminate the
requirement that an option granted under a plan to nonmanagement employees has
to vest a minimum of 20 percent per year over five years from the date the
option is granted.
• Eliminate the
restrictions on repurchase rights. This includes the minimum repurchase price,
the maximum repurchase period, and the right of repurchase to lapse as to at
least 20 percent of the shares per year.
• Clarify that
shareholders must approve the plan within one year of adopting it, and allow
foreign private issuers to issue options or stock under plans without such
approval as long as the number of recipients in
• Clarify that for
employees terminated other than for cause, options that can be exercised on the
termination date can be exercised until the earlier of: 1) the expiration date;
2) six months after a termination caused by death or disability; or 3) 30 days
after a termination with a cause other than death or disability.
• Eliminate the
requirement that common stock shares issued under the plan must carry equal voting
rights.
• Eliminate the
requirement that the total number of securities issuable under a plan that
complies with all of Rule 701’s conditions may not exceed 30 percent of the
company’s outstanding securities, unless a higher percentage is approved by two-thirds
of the outstanding securities entitled to vote.
• Eliminate the
requirement to provide financial statements at least annually to security
holders participating in plans or agreements that comply with all Rule 701
conditions.
The corporations commissioner
has also used the compensatory plan regulations in determining whether to approve
an application to qualify an issuance of securities under a compensatory plan.
However,
employers should be aware that in this context, certain restrictions, such as
those on repurchase rights, the super-majority vote provision, and the
requirement to distribute financial statements, will still apply.
These amendments are a
much-needed clarification to
compensatory plan regulations and should clear up many issues that have
troubled
employers in the past.