I’ve Been Trying to Get Down to the Heart of the Matter – the Board Action
by John Ludlum
If you ever want to see a benefits lawyer get nervous, start talking about corporate intent. Yes, the company intended to grant options at an earlier and lower exercise price, and yes it may have made promises to the individuals who would receive the awards; everybody seems to be in agreement. But there may be inadequate documentation, or worse, none at all, and the tax implications have to be considered. The foundation for any equity grant will be corporate action, and the experienced perspective is that if there is doubt about the corporate action, it will be hard to defend.
The Incentive Stock Option (“ISO”) regulations and the Code Section 409A regulations (“Section 409A”) both provide guidance on when an equity grant is actually made for the purposes of those Code Sections. For ISOs, the “date or time when the granting corporation completes the corporate action” constituting an offer under the terms of a statutory option which is not considered complete until the maximum number of shares and the minimum price are fixed or determinable. For Section 409A, the date when the “granting corporation completes the corporate action” necessary to create a legally binding right to the option which is not complete until the date on which the maximum number of shares and the minimum exercise price are fixed or determinable, and the class of underlying stock and the identity of the service provider are designated. Obviously, the regulations have similarities, but the common and essential element is the requirement for a corporate action. Read more