Why Do We Care? The proposed changes are beneficial to corporations because they create flexibility for existing compensatory equity plans (e.g., stock option plans, stock grant plans, omnibus plans).
What Are Some of the Changes? Some of the more important changes include:
- eliminating the requirement that grants to rank-and-file employees must vest on a schedule no less than 20% per year;
- expanding the list of those eligible to participate under the plan;
- eliminating the duration within which the company must exercise certain repurchase rights upon a participant’s termination of employment (applicable only if the plan is covered by the securities exemption contained in Section 25102(o));
- eliminating the requirement that repurchases from rank-and-file employees lapse at a rate of 20% per year if such repurchase price is pegged to the original purchase price (applicable only if the plan is covered by the securities exemption contained in Section 25102(o));
- eliminating the requirement that the company provide participants with financial statements on an annual basis;
- eliminating the restriction that the number of underlying securities subject to outstanding options not exceed 30% of the company’s outstanding securities;
- making it easier for out-of-state issuers to comply with the securities exemption contained in Section 25102(o); and
- more closely aligning the California provisions to Rule 701 of the Securities Act of 1933.
What Should We Do?
It is expected the proposed rules will become effective during the first half of 2007. Until then, companies who qualify their securities in California (or otherwise satisfy an applicable California securities exemption) should consult with their counsel to determine whether the equity plan(s) they sponsor can be amended to take advantage of the soon-to-be permitted design changes.
For further information, please contact a member of our Corporate Practice Group.