The Securities and Exchange Commission

[thepennyking]

New SRO Shareholder Approval Requirements for Mergers and Acquisitions
By Debbie Kurtzberg

The days of seeking shareholder approval of equity compensation plans are back, though under a different regulatory scheme. Under the NYSE’s recently revised listing standards and substantially similar revisions to the Nasdaq rules—both of which became effective on June 30, 2003—listed companies must obtain shareholder approval of most newly adopted equity compensation plans and of material amendments to most existing equity compensation plans.


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The NYSE and Nasdaq rules each provide a few limited exceptions to the shareholder approval requirements, including three exceptions that come up in the context of mergers and acquisitions.


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The NYSE and Nasdaq rules each provide a few limited exceptions to the shareholder approval requirements, including three exceptions that come up in the context of mergers and acquisitions. This note briefly describes those three exceptions. Note that this article does not address any other statutory or regulatory requirements regarding shareholder approval, such as certain U.S tax code provisions.

Rollovers

The rollover of options, restricted shares and other equity awards held by employees of a target company does not require approval of the shareholders of the acquiring company. In many acquisition transactions, including both cash and share transactions, employee options, restricted shares and other outstanding equity awards covering target company shares are converted at the time of the closing of the transaction into equivalent options, restricted shares or other awards covering shares of the acquiring company, as adjusted to reflect the transaction. If the principal terms of the converted awards (such as the type and duration of the awards) are substantially the same as the corresponding target company awards, shareholder approval of the new or converted awards will not be required under the new listing standards and rules. Any additional shares reserved for issuance by the acquiring company to cover converted awards will, however, count in determining whether the transaction itself must be approved by shareholders under the NYSE or Nasdaq provisions that require a listed company to obtain shareholder approval of any transaction that involves a potential issuance of 20% or more of the listed company’s outstanding common shares.

Post-Transaction Grants Under Preexisting Plans

The new listing standards and rules do not require shareholders of an acquiring company to approve grants of options, restricted shares or other equitybased awards covering shares of the acquiring company to employees of the target company or its preacquisition subsidiaries from shares remaining available for grant under a preexisting equity compensation plan of the target company. Shareholder approval will not be required in this case only if (i) the pre-existing plan was itself approved by the shareholders of the target company, (ii) post-acquisition grants are made during the original term of the preexisting plan and (iii) the number of shares of the acquiring company available for post-acquisition grants is adjusted to reflect the transaction. (A plan that is adopted in contemplation of the acquisition would not qualify as a pre-existing plan for these purposes.)

Once again, however, any additional shares reserved for issuance by the acquiring company to cover post-acquisition grants will count towards determining whether the transaction must receive shareholder approval because it involves the potential issuance of 20% or more of the acquiring company’s outstanding shares. Thus, if the inclusion of all shares available for grant under a pre-existing plan would put the acquiring company over the 20% threshold, the acquiring company may want to reserve less than all of such shares available so that the limit is not exceeded.

Employment Inducement Awards

The grant of options, restricted shares or other equity based awards covering an acquiring company’s shares to employees of a target company under a retention program is exempt from the new NYSE and Nasdaq listing requirements so long as the retention program is a material incentive for the target company employees to remain with the resulting entity. Broad based grants and individual grants to executives or other target company employees as well as grants to new employees are eligible for the exemption so long as the grants constitute a material inducement to remain with the company. Note that a listed company is required to issue a press release anytime it uses this exemption, as described below.

Approval of Independent Board Members Required; Notice to the NYSE; Press Release for Employment Inducement Awards

One final note: the independent compensation committee of the acquiring company (or a majority of the independent members of its Board) must approve the rollover of target company awards, post-acquisition grants and retention or other employment inducement grants for such transactions to be exempt from the new shareholder approval requirements. In addition, companies listed on the NYSE must notify the NYSE in writing when it uses one of these exemptions. Notice, which may be filed in electronic form, must be filed with the NYSE representative for the listed company as promptly as practicable following the rollover, post-acquisition grant or retention grant. If not previously filed, such notice must be included in the listed issuer’s first supplemental listing application filed with respect to the shares issued under the exemption. The notice must include sufficient details for the NYSE to verify that the grant qualifies for the exemption.


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The grant of options, restricted shares or other equity based awards covering an acquiring company’s shares to employees of a target company under a retention program is exempt from the new NYSE and Nasdaq listing requirements[.]


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In addition to notice to the NYSE, both the NYSE and Nasdaq rules require a listed company to issue an immediate press release when a listed company makes equity grants in reliance on the exemption for retention grants to target company employees or other employment inducement grants to newly hired employees. In the case of grants to one or more individuals who will become executives of the listed issuer following the transaction, the press release must identify the individual (or individuals) receiving the equity grant and the number of shares covered by the grant. If, on the other hand, grants are made under a retention program covering a broad class of employees of the target company, the press release can disclose the grants on an aggregate basis, in one press release, provided the grants are not individually negotiated and the release specifies the maximum number of employees covered by the program and the maximum number of shares that will be granted, assuming all eligible target company employees accept the retention grant.

About the Author

Debbie Kurtzberg is Counsel at Cleary, Gottlieb, Steen and Hamilton in New York City.


http://www.realcorporatelawyer.com/m&a/m&a0204.html