NCEO 2018 CEP Exam Prep Course Webinars compensation since 2009. She is currently the Sr. Manager, Total Rewards at MuleSoft, Inc. where she has spent the last two years implementing

NCEO 2018 CEP Exam Prep Course Webinars

NCEO’s CEP Exam Preparation Course – Spring 2018Level 3 Core Topic: Corporate & Securities Law

Presented bySamantha Adams, CEP

Mulesoft, Inc.Moderated by

Achaessa James, CEP, NCEO

Samantha Adams, CEP

Samantha (preferably “Sam”) has been working in and around equity compensation since 2009. She is currently the Sr. Manager, Total Rewards at MuleSoft, Inc. where she has spent the last two years implementing a new equity platform, designing and implementing a new stock plan, and preparing MuleSoft’s IPO which opened on March 17 last year.

Prior to MuleSoft, Sam was the Stock Administrator & Corporate Paralegal at Trulia, Inc. where she played an important role in Trulia’s IPO, subsequent follow on offering, and the acquisition of Market Leader, Inc. She was also responsible for administration of the 10b5‐1 program, and assisted with, among other things, earnings releases, Proxy reports, annual meetings, and Section 16 reporting.

A Los Angeles native, Sam received a BA in Sociology from UCLA in 2004 and made the move north to San Francisco in 2009. Samantha received her CEP designation in 2015.

IMPORTANT REMINDER

• Watch the Exam Tips recorded webinar if you have any questions about how to study using the CEPI binder materials

• The Reading List IS NOT a complete listing of the topics you need to study (it only goes down two outline levels)

• Refer frequently to the Exam Topics Outline (the “Syllabus”) to see all topics (there are often three to four outline levels)

• Download the new L3 2018 Suggested Best Reading Resource By Topic document

3


4

• L3 Law Reading Assignments

New Prep Course Resource:

Be sure to review and download the

L3 2018 Suggested Best Reading Resource by Topic

from the Prep Course Website

L1/L2 TOPIC UPDATES

• Blue Sky Laws (moved from L3 to L1, 2018)

• Corporate Governance > Pay Ratio Disclosure (new in L2, 2018)

NEW TOPICS & SUBTOPICS

• Tender Offer Regulation and Option Repricing

• Corporate Governance > Directors & Officers > Formula Plans

• Corporate Governance > Stock Market Regulations > Requirements

• ‘33 Act > Regulation D

• ‘33 Act > Rule 144 > Holding Period > Non‐Recourse Loans

• ‘33 Act > Securities Registration > Awards Not Requiring Registration

• ‘34 Act > Form 8‐K > Trigger Events and Filing Deadline

• ‘34 Act > Regulation 13D and 13G > Beneficial Owner Determination

• ‘34 Act > Reg S‐K > several subtopics

• ‘34 Act > Section 12 > Reporting Thresholds

• ‘34 Act > Section 16 Reporting/Matching > several subtopics

• ‘34 Act > Section 16(b) > Exemptions

• ‘34 Act > Securities Laws General > International Issues

Level 3 – Law New Assignments

5

APPENDIX MATERIALS

• Regulation S‐K – Item 405, Item 201, Item 402(k) other compensation

• Regulation D – Rules 504, Rule 506, and Accredited Investors

• New York Stock Exchange Rules

• Blue Sky Laws – Example, Exemptions & Registration (moved from L3 to L1, 2018)

• Pay Ratio Disclosure under the Dodd‐Frank Act

Level 3 – Law New Assignments

6


Formula Plan Definition

• If a Plan contains a formula for automatic increases in the shares available (aka Evergreen) OR

• A formula for automatic individual grants

Stock Exchange Rule

• Each such plan increase or automatic grant under such plan

• Is considered a revision which requires shareholder approval, and

• Will require shareholder approval unless it has a maximum 10 year term

For L3 exam – Pertinent use of Formula Plans

• Director Plans – Automatic annual grants to directors of restricted stock/options having a certain number of shares and/or dollar value, awarded at pre‐specified timing

7

Referen

ce: Selected

Issues section 4.2.1, 4.2.3,

4.4.4, 6.2.2, Th

e Stock Options Book section

4.3.2.1, Securities Sources, N

YSE Rules, 303A.08

Corporate Governance – D&O Formula Plans

“Independent director “ NYSE

• Affirmative determination by board of directors that individual director has no “material relationship” with the company and, in last 3 years has not:

• Been an employee of the company

• Had an immediate family member (“IFM”) that has been an executive officer of the company

• Received or had an IFM that received more than $120k/year direct compensation from the company (except director and committee fees, and pension or other deferred compensation for prior services)

• Been affiliated with/employed by/or had an IFM affiliated with/employed by the company’s auditor

…continued next slide

8

Referen

ce: Th

e Stock Options Book

section 4.3.2.2

Corp Governance – Stock Market Regulations

“Independent director “ NYSE (continued)

• Not been employed or had an IFM who was employed as an executive officer of another company where any of the current company’s present executives served on the other company’s compensation committee

• Not been an executive officer or an employee or had an IFM who was an executive officer of a company that had financial transactions with the current company during any single fiscal year in excess of $1 million or 2% of the other company’s consolidated gross revenues

• Dodd‐Frank compliance proposals

• Review the source of director compensation

• Review affiliation with company/subsidiaries/affiliates

Referen

ce: Selected

Issues section 4.2.1,

Composition of Plan A

dministration Committee;

Securities Sources, N

YSE Rules, 303A.02

9



“Independent director “ NASDAQ

• Similar requirements to NYSE

• Dodd‐Frank compliance proposals

• Listed companies appoint standing independent compensation committees

• Each compensation committee member meets general standards for director independence

• Committee members do not receive any kind of compensation from the company, with exceptions

• Board must consider whether committee member is affiliated with the company or any subsidiary or affiliate, and whether the affiliation would impair the director’s judgment in serving on the committee

10

Referen

ce: Th

e Stock Options Book section 4.3.2.2,

Composition of Plan A

dministration Committee;

Securities Sources, N

YSE Rules, 303A.02


Your Company is listed on the NYSE. In 2018 an individual is nominated for a board seat by an activist shareholder and is elected. Which of the following would prohibit them from serving as an independent director?

a. The individual’s daughter worked on the company’s audit in 2016.

b. The individual’s wife received $125,000 in consultancy fees in 2017.

c. The individual is employed by another firm that has received $1,237,429 in fees from the company in the past two fiscal years.

d. All of the above.

11


Your Company is listed on the NYSE. In 2018 an individual is nominated for a board seat by an activist shareholder and is elected. Which of the following would prohibit them from serving as an independent director?

a. The individual’s daughter worked on the company’s audit in 2016.

b. The individual’s wife received $125,000 in consultancy fees in 2017.

c. The individual is employed by another firm that has received $1,237,429 in fees from the company in the past two fiscal years.

d. All of the above.

Referen

ce: Securities Sources

NYSE Rule 303A.02

12







The Securities Act of 1933 – Reading/Syllabus Cross‐check

13New reading

Securities Sources, Rule 428

Your Company is not yet publicly traded and has just designed a new SAR plan. These awards will generally settle in cash, but the participants will be given a chance to choose stock settlement at the time of exercise. What registration exemption may the company be able to rely on?

a. Regulation D

b. Rule 144

c. Regulation S

d. No registration is required, so no exemption is required

The ‘33 Act – Regulation D

14


• Appears in Section 3(b) of ‘33 Act

• Two exemptions from registration requirements of Section 5 of the ‘33 Act

• Rule 504

• Rule 505 (removed in 2016)

• Rule 506 (federal and state exemption)

• Exemptions are federal, not necessarily state

• Filings must be done in compliance with Rules 501‐503, and other reporting requirements under the ‘33 Act and the Exchange Act

• Can be used only by issuers, reporting and non‐reporting, but not investment companies

• Exemption is for the current transaction, not the stock

• Can be used in conjunction with other exemptions

• Rule 701 exemption is preferable to Reg D exemption


15

Referen

ce: Selected

Issues, section 2.5.1

Award types not requiring registration

• Cash‐settled or stock‐settled?

• Cash‐settled only, registration is not required

• Stock‐settled only, registration is required unless an exemption applies

• Cash‐ or stock‐settled at discretion of holder, registration is required, unless exemption applies

• Decision by holder is considered investment decision equivalent to purchasing shares

• Decision to settle in cash is considered selling derivative rights to the stock

NOTE: Having an exemption available does NOT mean that registration is not required, it means that the security qualifies for an exemption

Referen

ce: Eq

uity Alternatives, section 2.7

The ‘33 Act – Registration Not Required

16

Your Company is not yet publicly traded and has just designed a new SAR plan. These awards will generally settle in cash, but the participants will be given a chance to choose stock settlement at the time of exercise. What registration exemption may the company be able to rely on?

a. Regulation D

b. Rule 144

c. Regulation S

d. No registration is required, so no exemption is required

Referen

ce: Eq

uity Alternatives, section 2.7


17


On April 1, 2015, a nonexecutive purchases stock directly from the company with a full‐recourse promissory note collateralized with the stock underlying the note. The employee is not a “sophisticated investor” for securities law purposes. The note is paid in full on June 2, 2016. The company becomes a reporting company upon its IPO on October 1, 2015. When can the employee first sell these unregistered shares?

a. January 1, 2016

b. April 1, 2016

c. June 2, 2016

d. December 2, 2016

Go to polling question #1 to answer

Corporate and Securities Law – Bonus 1 Question

18

• Holding Period. Rule 144 (d)(1)(iii) “If the acquiror takes the securities by purchase, the holding period shall not begin until the full purchase price or other consideration is paid or given by the person acquiring the securities…”

• Promissory Notes. Rule 144 (d)(2) “Giving the issuer…a promissory note…shall not be deemed full payment of the purchase price unless the promissory note…:

(i) Provides for full recourse against the purchaser of the securities;

(ii) Is secured by collateral, other than the securities purchased, having a FMV at least equal to the purchase price of the securities purchased; and

(iii) Shall have been discharged by payment in full prior to the sale of the securities.”

Referen

ce: Selected

Issues section 4.2.4, Th

e Stock Options Book, Appen

dix 2: Primary

Sources, SEC

Rule 144

The ‘33 Act – Rule 144/Holding Period/Loans

19

Correct answer: d – December 2, 2016

Explanation: Because the employee makes a direct purchase of stock, Securities Act Rule 144 governs. (Rule 701 applies only to exercises of stock option issued under a written plan.) Under Rule 144, the six‐month holding period for non‐affiliates is measured from the date when the securities are paid for in full.

Payment with a promissory note that is essentially financed by the company does not constitute full payment unless the note is a full‐recourse obligation and is collateralized by property other than the shares of stock being purchased and that has a fair market value at least equal to the total purchase price of the shares. Even so, the promissory note must be repaid in full before the sale of the restricted securities is considered to have occurred.

B1

20

Corporate and Securities Law – Bonus 1 Answer & Explanation

Referen

ce: Selected

Issues section 4.2.4, Th

e Stock Options Book, Appen

dix 2: Primary

Sources, SEC

Rule 144


• Section 12 > Reporting Thresholds

• Form 8‐K > Trigger Events and Filing Deadline

• Regulation 13D and 13G > Beneficial Owner Determination

• Regulation S‐K

> Option Repricing Info > Stockholder Approval

> Summary Comp Table/CD&A > Emerging GrowthCompanies

• Section 16 Reporting Requirements &Matching Exemptions

> Cancellation & Regrant

> Cash Settlement of an SAR

• Section 16(b) > Exemptions

• Securities Laws General > International Issues

21

Securities Exchange Act of 1934

Public company vs Reporting company

• Listed on national stock exchange or

• Excludes “foreign private issuers”

• Section 12 reporting thresholds can trigger “public company” status for a non‐listed company

22

Referen

ce: Selected

Issues in Equity

Compen

sation sections 2.1.2, 4

.3.1

‘34 Act – Section 12, Reporting Thresholds

Your Company is not doing so well. An outside investor agrees to buy 4.5% of the company’s stock via a private placement. In return the company agrees to make the investor a director. What must the company file with the SEC?

a. 10‐K

b. S‐1

c. 8‐K

d. Form 3


Referen

ce: Selected

Issues section 4.4.1

23

‘34 Exchange Act – corporate filing requirements


Your Company is not doing so well. An outside investor agrees to buy 4.5% of the company’s stock via a private placement. In return the company agrees to make the investor a director. What must the company file with the SEC?

a. 10‐K

b. S‐1

c. 8‐K (current report of certain significant non‐recurring events)

d. Form 3

Referen

ce: Selected


24

‘34 Exchange Act – corporate filing requirements

Reporting Trigger. Real‐time public company reporting of significant corporate events. A Form 8‐K must be filed only in the following circumstances:

• Director removal for cause, resignation or refuses to stand for reelection because of a disagreement with the company

• Principal officer or NEO retires, resigns, is terminated, or if director leaves the board for any reason other than disagreement

• New principal officer is appointed

• New director elected outside of annual or special meeting of shareholders

• Company adopts a new material compensation plan, contract or arrangement and a principal officer or NEO participates or receives an award under the plan

Filing Deadline. Within 4 business days of triggering event. In addition to individual reporting under Section 16(a)

Referen

ce: Selected

Issues in Equity

Compen

sation section 4.4.1

‘34 Exchange Act – Regulation 8‐K

25

• Voting Power. Power to vote or direct the vote of the security

• Investment power. Power to dispose of or direct disposition of the security

• Group ownership.

• 2 or more persons acting together to acquire or vote

• Group formed on date of agreement to act together

• Ownership is aggregated for purposes of 5% ownership rule (the Williams Act)

• All members file Schedule 13D or 13G

Referen

ce: Selected

Issues section 2.7,

Securities Sources, Regulation 13D‐G

‘34 Exchange Act – Regulation 13D‐G

26


Joe just inherited stock from your company, which is still privately held. He is the beneficial owner of 6% of the outstanding common stock and will not have a seat on the board. What Schedule should he file and when must it be filed?

a. Schedule 13G, filed 10 days from the purchase date

b. Schedule 13D, filed 10 days from the purchase date

c. Schedule 13G, filed 45 days after the end of calendar year in which 13D would have been required

d. Schedule 13D, filed 45 days after the end of the year of purchase

27


Differences between Schedule 13D and 13G

• Type of investor:

• Active investor: Schedule 13D, institutional or individual

• Passive investor: Schedule 13G, less than 21% ownership

• Both:

• Identity and background of reporting person/group

• Class of equity securities and beneficial ownership

• Schedule 13D:

• Source and amount of funds used to acquire security

• Purpose of acquisition

• Agreements between acquiror and issuer

• Filing:

• Schedule 13D original within 10 days of acquisition, amendments upon 1% or more change in beneficial ownership or other material changes to prior report

• Schedule 13G original within 45 days of end of calendar year in which 13D would have been required, amendments by February 14 of each succeeding year (some exceptions to file earlier)

Referen

ce: Selected

Issues in Equity

Compen

sation section 2.7

28


Joe just inherited stock from your company, which is still privately held. He is the beneficial owner of 6% of the outstanding common stock and will not have a seat on the board. What Schedule should he file and when must it be filed?

a. Schedule 13G, filed 10 days from the purchase date

b. Schedule 13D, filed 10 days from the purchase date

c. Schedule 13G, filed 45 days after the end of calendar year in which 13D would have been required

d. Schedule 13D, filed 45 days after the end of the year of purchase

29


Referen

ce: Selected

Issues in Equity

Compen

sation section 2.7


Level 3 – Regulation S‐K new subtopics

Item 402 – Executive Compensation Disclosure Table

• Option Repricing Info > Stockholder Approval

• Summary Comp/CD&A > Emerging Growth Companies

Level 2 – Regulation S‐K subtopics (NEW Level 3 reading)

Item 201 – Equity Reporting

• Plan Disclosures > Non‐Approved Plans

Item 405 – Section 16 Noncompliance Reporting

• Item 405 > 16(a) Late Filing Consequences

Item 402 – Executive Compensation Disclosure Table

• Annual Compensation > Directors

• Annual Compensation > Determining NEOs

• All Tabular Disclosure subtopics

Referen

ce: Securities Sources, R

egulation S‐K,

Item

s 201, 4

02, 4

05

‘34 Exchange Act – Regulation S‐K

30

Referen

ce: Securities Sources,

Regulation S‐K, Item 402

31


Item 402(k) – Compensation of Directors

• For each director (except NEO’s) tabular disclosure provides:

• Fees earned or paid in cash

• Stock awards*

• Option awards*

• Non‐equity incentive plan compensation

• Change in pension value and nonqualified deferred compensation earnings

• All other compensation

• Total

*Tabular reporting is in aggregate with footnotes that details each individual equity award

32


Reference: Securities Sources, R

egu

lation S‐K,

Item

402(k)



• Footnote information on stock and option awards

• ASC 718 grant date fair value

• ASC 718 incremental value of any modified awards, except for repricings that occur by

• pre‐existing formula/mechanism that results in periodic adjustments of exercise or base price

• antidilution provision

• Recapitalization or similar transaction that equally affects all holders of the same class of underlying security as the award

• Aggregate number of awards still outstanding as of the fiscal year end

33


egu

lation S‐K,

Item

402(k)


Item 402(c) – Summary Compensation Table

• (v) The aggregate ASC 718 grant date fair value of stock awards (column e)

• (vi) The aggregate ASC 718 grant date fair value of option awards (column f)

Item 402(n) – Smaller reporting companies – Summary compensation table

34


egu

lation S‐K,

Item

402(c)

‘34 Exchange Act – Regulation S‐K > Repricing

35


egu

lation S‐K,

Item

402(d)


Item 402(d) – Grants of Plan‐Based Awards Table

• (viii) The ASC 718 grant date fair value of each equity award (column L)


• Item 402(e) – Narrative disclosure to summary compensation and plan‐based awards tables

• Item 402(o) – Smaller reporting companies ‐ Narrative disclosure to summary compensation and plan‐based awards tables

36


Referen

ce: Th

e Stock Options Book section

16.3.3, Selected

Issues

section 7.2.4

37

‘34 Exchange Act – Regulation S‐K > Repricing Approval

Repricing Disclosures for Proxy Solicitation

• Narrative description of the option exchange program

• Who is eligible to participate

• Securities subject to the program, the exchange ratio, new securities terms

• Table showing benefits/amounts that will be received by

• Named Executive Officers (NEOs)

• All current executive officers (EOs) as a group

• All current directors as a group (non‐EOs)

• All employees and officers (not NEOs/EOs) as a group

• Reasons for undertaking the exchange and any alternatives considered

• Accounting treatment of the new securities and US tax consequences

No securities law requirements for

shareholder approval of repricings.

Referen

ce: Th

e Stock Options Book, section 8.2

‘34 Exchange Act – Reg S‐K > Emerging Growth Companies

Smaller Reporting Company

• Common equity “public float” of less than $75 million, or (if unable to calculate public float)

• Annual revenue of $50 million or less

Emerging Growth Company

• Classification created by Jumpstart Our Business Act of 2012 (JOBS Act)

• Private companies and newly public companies that registered shares after December 8, 2011

• Total annual gross revenues of less than $1 billion in the previous fiscal year (adjusted for inflation every 5 years)

38


Emerging Growth Company retains status until earlier of

• Last day of fiscal year in which it has total annual gross revenues of $1 billion or more;

• Last day of fiscal year following the 5th anniversary of the date of the first sale of common equity securities under an effective ‘33 Act registration statement;

• The date on which issuer has, during previous 3 years, issued more than $1 billion in non‐convertible debt; or

• The date on which issuer is deemed to be a “large accelerated filer,” by reason of an aggregate worldwide market value of common equity held by non‐affiliates of $700 million or more and has been subject to ‘34 Act filing requirements for at least a year.

39

Referen

ce: Th

e Stock Options Book, section 8.2


SEC reporting and registration requirements

• Registration.

• Emerging growth company status does not affect whether the shares are required to be registered or whether exemptions are available.

• Allowed to communicate with certain investors and other parties while still in registration

• Reporting. Basically the same as “smaller reporting company” for public companies

• Certain SEC filings can be filed confidentially

• Offering documents

• Draft registration statements

• Exempt from certain Reg S‐X financial disclosures

• Can phase in auditor attestation report on internal controls

40

Referen

ce: Th

e Stock Options Book, section 8.2,

Selected

Issues

section 4.3.3.1


SEC reporting and registration requirements

• Required reporting under Item 402:

• Summary Compensation Table as to only 3 NEOs for 2 fiscal years, instead of 5 NEOs for 3 fiscal years

• Outstanding Equity Awards at Fiscal Year‐End Table

• Director Compensation Table

• Limited narrative disclosure about employment agreements, post‐employment compensation arrangements, and recent equity awards to NEOs

• Compensation Discussion & Analysis (CD&A) is NOT REQUIRED

41

Referen

ce: Selected

Issues

section 4.3.3.1



‘34 Exchange Act – Section 16 Rtpg & MatchingRule 16b‐3 and Cancellation/Regrant

42

Referen

ce: Selected Issues in Equity

Compen

sation section 7.4.4

Referen

ce: Selected Issues

sections 2.2.5, 2

.3.1

‘34 Exchange Act – Section 16 Rtpg & MatchingRule 16b‐3 and Cash‐settlement of SAR

43

Reference: Securities Sources Rule 16b‐3,

Selected

Issues

section 4.2.3 Formula Plan/Directors Plan. Exempt from Section 16(b) short‐

swing profits via Rule 16b‐3 if:

• Terms of all subsequent transactions are fixed in advance (at the time of initial approval)

• Number of shares

• Exercise price

• Timing of award grant date

44

‘34 Act – Section 16 Reporting & Matching Exemptions






Securities Law – General UnderstandingInternational Issues

45

Referen

ce: The Stock Options Book section 8.8

General Overview

• Non‐US employees who receive securities in US companies are generally subject to US securities laws for the transactions (the buying and selling)

• Some countries limit or restrict ownership of foreign securities by their citizens

• Issuers may also be subject to foreign securities laws:

• Disclosure and reporting requirements on transfer of employee‐owned securities

• Exchange/currency controls on the transfer of funds to a foreign country for the purchase of securities

46



Referen

ce: Equity Alternatives section 3.7,

GPS: Global section 3

Restricted stock awards, units and purchases

• Education is key in overcoming cultural and language differences

• Labor laws, protected employee groups, and entitlements to future awards or rights upon termination

• Employment status

• Discrimination

• Labor unions

• US data privacy laws are too lax for foreign jurisdictions

• Currency exchange controls

• Employee communication and documentation

• Translations

• Transmission method

• Change in life events

47


Referen

ce: GPS: Global Stock Plans section 3

Legal Issues

Deployment of international equity compensation plans

• Consult local counsel in every target country

• Create a country‐specific administration guide with key requirements

• The company may have to

• Register plan/shares or file for an exemption

• Prepare a prospectus in the local language

• Be licensed as a broker/dealer or use a local broker/dealer

• Employees may be subject to

• Resale restriction

• Currency repatriation requirements

• Obtain an exemption to sell shares

• Special reporting requirements for Directors

• U.S. securities laws

48


Referen

ce: GPS: ESPP section 9.4

Employee Stock Purchase Plans – Legal Issues

• 9.4.1 Legal issues may impact all aspects of the ESPP process

• 9.4.2 Local legal counsel is best practice

• 9.4.3 Develop country‐specific administration guide for each jurisdiction’s key requirements

• 9.4.3.1 ESPP more likely to be considered an “acquired right” than options or RSUs because

• Payroll contributions

• Offered to all employees

• Offering is continuous and purchases automatic

• Payroll contributions are problematic in their own right

• Securities registrations in foreign jurisdictions

• Exchange control issues

49



50

Tender Offer & Option Repricing – Reading/Syllabus Cross‐check

Assigned Reading:• Selected Issues sections 7.2, 7.3

Tender Offer & Option Repricing ‐ Definition

Tender offer. A tender offer is a statement from the issuer to a security holder proposing an exchange of one security for another (or cash) and setting forth an exchange ratio which indicates how many of the original securities must be “tendered” back to the issuer in order to receive a determined number of replacement securities (or cash).

Referen

ce: Selected Issues glossary

51

Referen

ce: Selected Issues section 7.2.1

• Original plan should contain a provision for repricing underwater options

• Structure of repricing

• Types of exchanges

• One‐for‐one exchanges

• Value‐for‐value exchanges

• Substituting restricted stock or RSUs for options

• Cash out underwater options

• Key terms

• Exchange ratio

• Option eligibility

• New vesting periods

• Return tendered shares to share reserve pool

Tender Offer & Option Repricing – Plan Provisions

52


Stock exchange requirements (NYSE and NASDAQ)

• Shareholder approval of repricing required unless it is an existing term in the original plan.

Institutional Shareholders and Proxy Advisors

• No approval of plans that permit repricing without shareholder vote

• Generally viewed as favorable repricing terms and circumstances by advisors:

• Officers and board members do not participate

• Stock decline mirrors market/industry declines in timing and magnitude

• Repricing is value‐neutral or value‐creative for shareholders, with very conservative assumptions

• Management and the board make a cogent case for the repricing

53

Referen

ce: Selected


Tender Offer & Option Repricing – Institutional Shareholders

Referen

ce: Selected

Issues sections 7.3.1 and 7.3.2

Tender Offers

• Triggered by holder needing to make an investment decision regarding purchase, modification or exchange of a security.

• Value‐for‐value exchange reduces number of shares

• ISO exchanges restart statutory holding periods

• Simple reduction of price on non‐ISO awards may be able to avoid tender offer rules

• Governed by the ‘34 Exchange Act

• Rule 13e‐4 (public companies) and

• Regulation 14E (all tender offers)

• Schedule TO

Tender Offer & Option Repricing – Tender Offers and Schedule TO

54

Referen

ce: Selected

Issues sections 7.3.1 and 7.3.2

Communication & Documentation ‐ Schedule TO

• Before the offer is launched the company may distribute information about the exchange but it cannot contain a form for or information about obtaining the form for tendering options

• Documentation filed under Schedule TO

• Offer to exchange and “summary term sheet”

• Letter of transmittal (tender mechanism)

• Ancillary documents

• Launch the repricing offer

Tender Offer & Option Repricing – Communication Restrictions & Schedule TO

55


Referen

ce: Selected


Repricing offer is open

• Offer must remain open minimum 20 business days

• SEC may comment and company must respond

• If consideration offered or percentage of securities sought changes, offer must remain open minimum 10 business days from date of publication of change

• Other certain material changes require another minimum 5 business days thereafter

• At end of period replacement securities are issued

• Exempt from registration per Section 3(a)(9) of the ‘33 Act as exchange of securities by issuer for no consideration

Repricing offer concludes

• Company files final amendment to Schedule TO to report number of option holders who accepted offer

Tender Offer & Option Repricing – Timing

56

Reference: Selected


Proxy Disclosure

• Governed by Section 14(a) of the ‘34 Exchange Act

• Disclosure items commonly include:

• Description of the exchange program, who is eligible to participate, securities subject to offer, exchange ratio, terms of the new securities

• Table disclosing benefits or amounts that will go to 1. NEOs, 2. all current executive officers as a group, 3. all current directors as a group (excluding directors who are also officers), 4. all employees as a group (excluding 2., above)

• Narrative description of reasons for the exchange and alternatives considered by the Board

• Accounting treatment of the replacement securities and US federal income tax consequences

• File proxy statement in preliminary form for SEC approval, then file final and commence solicitation

Tender Offer & Option Repricing

57

Questions ?

Achaessa James, CEPNational Center for Employee Ownership

1629 Telegraph Ave., Suite 200Oakland, CA 94612‐3445

510‐208‐[email protected]


NCEO’s CEP Exam Preparation Course Level 3 Core Topic: Corporate and Securities Law

APPENDIX MATERIALS

3

Level 3 – Corporate & Securities LawAppendix Materials

• Regulation S‐K – Item 405, Item 201, Item 402(k) other compensation

• Regulation D – Rules 504, Rule 506, and Accredited Investors

• New York Stock Exchange Rules

• Blue Sky Laws – Example, Exemptions & Registration

• Pay Ratio Disclosure under the Dodd‐Frank Act

A1

Item 405 – Section 16(a) Beneficial Ownership Reporting Compliance:

• Reports failure of reporting persons (RPs) to timely file Forms 3, 4 and 5

• SEC penalties can include fines for late filings or enjoin late‐filer from serving as director or officer

• Statute says report is based solely on issuer’s review of Forms provided to it by RPs, or statements by RPs that no Form 5 is required, however

• Section 16 says issuer is obligated to consider absence of certain forms

• Statement by RP that no Form 5 is required is “safe harbor” for issuer

• Issuer should send out annual questionnaire to all RPs for self‐reporting of Section 16 filings

‘34 Exchange Act – Regulation S‐K, Item 405

Referen


egulation

S‐K, Item 405, Selected Issues

section 2.2.6

A2


Item 201 – Equity Reporting:

• (a) market information

• (b) holders

• (c) dividends

• (d) securities authorized for issuance under equity compensation plans

• “Prior to adoption of new SEC disclosure rules in 2006, Item 201(d) of Regulation S‐K provided that the material terms of a discounted option were required to be filed in equity plan disclosures.” TSOB section 14.2.3

• (e) performance graph

…details on following slides


egulation S‐K,

Item

201, The Stock Options Book section 14.2.3

A3


Item 201 – Equity Reporting: (continued)

• (a) market information – market, high/low prices, and common equity

• subject to outstanding options and warrants or convertible to common equity,

• that could be sold or that registrant has agreed to register for sale by holders, or

• that is being or is proposed to be publicly offered and such offering could have a material effect on the market price

• (b) holders – number of holders of each class; if filing is transaction‐related state effect of transaction on holdings of >5% holders, directors and nominees individually, directors and officers as a group, and registrant’s outstanding equity commitments to such persons

• (c) dividends – cash dividends for last 2 fiscal years


A4


Referen


egulation S‐K,

Item

201


• (d) securities authorized for issuance under equity compensation plans

• Tabular disclosure aggregated by plans that have previously received shareholder approval and plans which have not been previously approved, and which breaks out

• # securities to be issued upon exercise of options, warrants and rights

• Weighted‐average exercise $ of outstanding options, warrants and rights

• # securities remaining available for future issuance under plans (excluding 1st item above)

• As of end of most recent fiscal year

• Include narrative on material plan features for each non‐shareholder approved plan


A19

A5


Referen


egulation S‐K,

Item

201, see also, tab

ular form

at on page 93



• (e) performance graph

• Line graph comparing yearly % change in cumulative TSR over last 5 fiscal years on a class of registered common stock with the

• Cumulative total return of a broad equity market index assuming reinvestment of dividends, that includes companies traded on same exchange or which are of comparable market capitalization (or S&P if company is on that index), and

• Cumulative total return, assuming reinvestment of dividends, of

• A published industry or line‐of‐business index,

• Peer issuer(s) selected in good faith, or

• Issuer(s) with similar market cap if neither of the above are available.

A20

A6



egulation S‐K,

Item

201, see also, tab

ular form

at on page 93


• All other compensation

• Perquisites and personal benefits or property with aggregate value of $10,000 or more

• “Gross ups” or other amounts reimbursed for payment of taxes

• The ASC 718 compensation cost of any security purchased at a discount from the issuer, unless such discount is available to either all salaried employees of the issuer or all security holders of the issuer

• Amounts paid or accrued in connection with:

• Resignation, retirement or other termination

• Change in control of the issuer

• Issuer contributions or allocations to defined contribution plans


A7

‘34 Exchange Act – Regulation S‐K, Item 402(k)

Referen


egulation S‐K,

Item

402

Item 402(k) – Compensation of Directors (continued)

• All other compensation (continued)

• Consulting fees earned from, paid, or payable by the issuer or its subsidiaries

• Annual costs of payments and promises of payments to director legacy programs and similar charitable award programs

• Dollar value of life insurance premiums paid by or on behalf of the issuer during the fiscal year for the benefit of the director

• Dollar value of dividends or other earnings paid on stock or option awards, when those amounts were not factored into the grant date fair value reported in the stock award or option award columns

A8

‘34 Exchange Act – Regulation S‐K, Item 402(k)

Referen


egulation S‐K,

Item

402


Rule 504 – Exemption for Limited Offerings & Sales Not Exceeding $5,000,000 (limit increased as of 1/20/17)

• Not available to issuers subject to Sections 13 or 15(d) of the Exchange Act, investment companies, certain development stage companies

• Does not require offerees to be sophisticated or knowledgeable investors

• No specific issuer information is required to be disclosed

• Offering maximum $5 million of stock in a rolling 12‐month period

• Reduced by amount of other Section 3(b) exempt offerings during period

• Offering is deemed to be continuing for entire period during which options are exercisable

Referen

ce: Selected

Issues, section 2.5.1 and

Securities Sources, R

egulation D

The ‘33 Act – Regulation D, Rule 504

A9

Rule 506 – Exemption for Limited Offerings & Sales without Regard to Dollar Amount of Offering

• Purchaser limit

• Maximum of 35 sophisticated, nonaccredited investors

• Unlimited number of accredited investors (Rule 501(e)(1)(iv) specifically excludes counting accredited investors against purchaser limit)

• Corporations created solely to purchase shares under offering, if not accredited, each shareholder of the corporation shall count as a purchaser unless s/he is an accredited investor

• Purchaser disclosures required when nonaccredited investors are allowed to participate (also true for Rule 505 exemption)

A10

Referen

ce: Selected

Issues, section 2.5.1 and

Securities Sources, R

egulation D

The ‘33 Act – Regulation D, Rule 506

Accredited Investor – Institutions

• Bank

• Savings and loan

• Registered broker/dealer

• Insurance company

• Registered investment company, business development company, or private business development company under Investment Company Act of 1940

• Licensed SBIC

• State plan with over $5 million assets

• Employee benefit plan under ERISA

• 501(c)(3) corporation or similar business trust

• Trust with over $5 million assets

• Any entity solely owned by accredited investors

Referen


egulation D,

Rule 501(a), subsections (1),(2),(3), (7), (8)

A11

The ‘33 Act – Regulation D, Accredited Investors


Accredited Investor – Individuals

• Issuer‐affiliated individuals. Director, executive officer, general partner

• Independent individuals. Natural person with net worth over $200,000 (or joint with spouse over $300,000) in each of 2 most recent years and expects same income in current year

• Independent individuals. Natural person with net worth over $1 million (alone or with a spouse), except:

• Primary residence excluded from assets, and related secured debt in excess of property value excluded from liabilities, unless

• the right to purchase the offered securities was held on July 20, 2010

• the person was an accredited investor at the time the right was acquired

• the person held other securities of the same issuer on July 20, 2010

A12

Referen


egulation D,

Rule 501(a), subsections (4), (5), (6)

The ‘33 Act – Regulation D, Accredited Investors

Corporate Governance – NYSE Rules

303A.08 Shareholder Approval of Equity Compensation Plans

• Definition of Equity Compensation Plan

• A plan or arrangement that provides for delivery of equity securities as compensation for services.

• Not “equity compensation plan”

• Plans that are available to all shareholders

• Plans to service providers for purchase of shares at current fair market value

• Exemptions

• Employment inducement awards

• Merger and acquisitions

• Qualified plans, parallel excess plans and Section 423 Plans, and equivalent plans in foreign jurisdictions

• Pre‐existing plans, with exceptions

…continued on following slides

Referen

ce: Securities Sources , NYSERule 303A.08,

GPS: Perform

ance Awardssection 4.2

A13

Your Company is listed on NYSE. You have a stock option plan that only allows NQSOs. The plan has a 25 year term. An evergreen provision is approved when the plan is rolled out. The provision ensures the plan will always have shares equal to 3% of the outstanding shares. How often must the this plan be reviewed or approved by shareholders?

a. At the end of the 25 year term

b. Any time there is a material modification to plan features

c. Every ten years

d. No need to review


Referen

ce: Selected

Issues, section 6.2.2,

Securities Sources , NYSERule 303A.08

Corporate Governance – Stock Market Rules

A14



303A.08 Shareholder Approval of Equity Compensation Plans (continued)

Material revisions requiring shareholder approval

• A material increase in the number of shares

• Plans that have evergreen provisions or formula plans which have a term of more than 10 years

• Plans that have no limit on the number of shares available require shareholder approval of each grant under the plan (“discretionary plan”) without regard to plan term

• An expansion of the types of awards available under the plan

• A material expansion of plan participants

• A material extension of the term of the plan

• A material change to the method of determining the strike price of options under the plan

• Deletion or limitation of provisions prohibiting option repricing.

A15

Referen

ce: Securities Sources , NYSERule 303A.08

Your Company is listed on NYSE. You have a stock option plan that only allows NQSOs. The plan has a 25 year term. An evergreen provision is approved when the plan is rolled out. The provision ensures the plan will always have shares equal to 3% of the outstanding shares. How often must the this plan be reviewed or approved by shareholders?

a. At the end of the 25 year term

b. Any time there is a material modification to plan features

c. Every ten years

d. No need to review

Referen

ce: Selected

Issues, section 6.2.2,

Securities Sources , NYSERule 303A.08

Corporate Governance – Stock Market Rules

A16

303A.08 Shareholder Approval of Equity Compensation Plans (continued)

Repricings

• A plan that does not specifically permit option repricing is considered as prohibiting repricings.

• Any repricing under such a plan will be considered a material revision of a plan even if the plan is not revised

• Defined as

• Lowering the strike price of an option after grant

• Any other action that is treated as a repricing under GAAP

• Canceling an option when it’s strike price exceeds the FMV of the underlying stock, in exchange for another equity instrument

• unless such cancellation and exchange are related to a corporate transaction

A17


Referen

ce: Securities Sources , NYSERule 303A.08


312.03 Shareholder Approval…is required

• For equity compensation plans (see prior slides)

• Where the issuance will result in a change in control

• Where the number of shares of common stock or convertible stock exceeds 1% of the authorized common stock or voting power outstanding before the issuance, shareholder approval is required prior to the issuance of such security to

• A director, officer or substantial security holder of the company (each a “Related Party”)

• A subsidiary, affiliate or other closely‐related person of a Related Party

• Any company or entity in which a Related Party has a substantial interest, direct or indirect

• See exception for application to issuance to “substantial security holder”


A18

Referen

ce: Securities Sources , NYSERule 312.03


312.03 Shareholder Approval…is required (continued)

• Prior to the issuance of common stock or convertible stock when

• The stock has or will have voting power of 20% or more before the issuance, or

• The number of shares to be issued is or will be 20% or greater than the number of shares outstanding before the issuance

• Except if such issuance is

• A public offering for cash

• A bona fide private financing and the financing involves a sale of common stock or convertible stock for cash at a price at least as great as the book and the market value of the common stock

• Exception for limited partnerships for all except shareholder approval of equity compensation plans

A19

Referen

ce: Securities Sources , NYSERule 312.03


Exemptions for option plans – The Stock Options Book

Blue Sky Laws – General Understanding

Definition – Selected Issues glossary

Referen

ce: Selected

Issues

chap

ter 3 intro

and fn.2, Th

e Stock Options Book section 8.1

A20


Blue Sky Laws – Identifying Applicable BSL

Jurisdiction – what state laws apply?

• State of incorporation – maybe (issuer)

• State of offering – definitely

• Where the offering is authorized (issuer)

• Where the offering is made (issuer)

• Where the offering is received (investor/employee)

• State of sale – definitely

• State of headquarters (issuer)

• State of employment (employee)

• State of residence (employee/investor)

Referen

ce: Selected


A21

Relevant laws – which laws and regulations apply?

• State securities act

• Regulations under act

• State administrative agency

• Interpretive guidance

• Regulatory decisions

• No‐action letters

• Legal precedence

• Judicial interpretation of laws and regulations

• Conflict of law issues

A22

Blue Sky Laws – Identifying Applicable BSL

Referen

ce: Selected


Applicable exemptions

• Exemption for award issuance (exempt transaction)

• Blanket exemptions

• Exemption for underlying security

• Exempt transactions

• Securities must be issued in connection with a plan that meets IRC requirements

• Securities must be issued in connection with a plan that meets Rule 701 requirements

A23

Blue Sky Laws – Exemptions

Referen

ce: Selected



Applicable exemptions (continued)

• Blanket exemptions

• Common requirements on a state‐by‐state basis:

• Securities must be issued in connection with employee benefit plan that meets IRC requirements

• Securities must be issued in connection with a plan that has been submitted to the state securities law administrator

• Securities must be issued pursuant to a plan that only applies to employees and directors.

A24


Referen

ce: Selected


Applicable exemptions (continued)

• Exempt transactions

• Offering to existing security holders

• Limited offering exemptions

• Private offerings – limits number of offerees, purchasers, aggregate value of sale, number of resulting shareholders, and requires disclosures

• Regulation D, Rule 506 – offers and sales under this Rule are exempt from state blue sky laws (except for notice requirements in some states)

• Does not limit dollar amount of offering

• Disclosure material not required for offerings to only “accredited investors”

• “Accredited investors” don’t count against limit on purchasers

• Public company stock issuance upon option exercise

A25


Referen

ce: Selected


and 3.2.2

When no exemption is available

• Registration by coordination or qualification

• Registration statement

• Issuer information, including subsidiaries, officers and directors

• Capitalization, including kind and amount of securities to be offered

• Anticipated proceeds from offering and how proceeds will be used

• Prospectus or offering circular

• Legal opinion

• Financial statements

A26

Blue Sky Laws – Registration

Referen

ce: Selected



Corporate Governance – Pay Ratio Disclosure

Pay Ratio Disclosure under the Dodd‐Frank Act of 2010

• Calculate media annual total compensation of all company employees (excluding CEO) at least every three years

• Methodology for identifying median employee is flexible but must be consistently applied

• May exclude certain non‐U.S. employees

• Emerging Growth Companies exempt

• Annual disclosures include

• Median employee compensation

• Ratio by which CEO compensation exceeds median employee compensation

• Methodology for identifying median employee and for calculating pay ratio

• Must be included in proxy statements, registration statements, and financial statements

• Beginning with 2018 proxy statement for FY 2017

Referen

ce: Stock Options Book

section 13.2.4.1

A27

Questions ?

Achaessa James, CEPNational Center for Employee Ownership

1629 Telegraph Ave., Suite 200Oakland, CA 94612‐3445

510‐208‐[email protected]

Documents

NCEO 2018 CEP Exam Prep Course Webinars compensation since 2009. She is currently the Sr. Manager, Total Rewards at MuleSoft, Inc. where she has spent the last two years implementing