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SCHLEY & LOOK LLP Legal Update Memorandum Date: February 3, 1999 Re: New Rules re Transferable Stock Options
The California Commissioner of Corporations has released new regulations that, for the first time, permit California employers to give their employees (and directors and consultants) stock options that are transferable during life. This will facilitate estate tax planning by option holders and will make stock options a more valuable incentive. The new rules took effect January 29, 1999. The new rule permits stock options to be transferable "by instrument to an inter vivos or testamentary trust in which options are to be passed to beneficiaries upon the death of the trustor (settlor), or by gift to "immediate family" as that term is defined in 17 C.F.R. 240.16a-1(e)." This is desirable because gift and estate taxes may be much lower for the gift of an option than for a gift of stock acquired from an option exercise. The new California rule makes it possible to take advantage of option gifting strategies already permitted by IRS and SEC rules. Prior California law permitted option transfers only by will or intestate succession. Employee, director and consultant stock options provide businesses with an affordable as well as tax-advantaged means of attracting and compensating valuable personnel. Statutory stock options provide an employee a means of participating in the success of the company, with little tax impact associated, and they provide an employer with a means of compensating personnel without expenditures of cash. With the addition of the newly recognized transferability feature, such stock options present an even more attractive employee compensation vehicle. We are alerting our California clients about this rule now, because it may warrant a change in an existing stock option plan so that outstanding and future option grants will have this feature. To further our clients’ interests, we submitted a comment letter to the Commissioner recommending these changes, and provided additional information to the Commissioner’s legal department so that they could better understand the advantages of transferable stock options. If you would like more information about how this new rule can work to the benefit of companies and their option holders, please do not hesitate to contact us. Michael D. Schley Joseph F. Look Peter L. Stacy For more information, contact:
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