Company Name: American Bar Association (ABA)
Public Availability Date: 02-14-1989
INQUIRY LETTERAMERICAN BAR ASSOCIATION
750 NORTH LAKE SHORE DRIVE
CHICAGO, ILLINOIS 60611
TELEPHONE(312) 988-5588
November 23, 1988 Securities Act of 1933 -- Form S-8 William E. Morley, Esq.
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Dear Mr. Morley: On behalf of the Federal Regulation of Securities Committee Subcommittee on
Employee Benefits and Executive Compensation of the American Bar Association's
Section of Business Law, I am writing to request the staff's views on an issue
of general interest relating to the use of Form S-8. Specifically, the
Subcommittee would like the staff to confirm that when an issuer uses Form S-8
to register shares issuable pursuant to non-transferable stock options granted
to employees pursuant to an employee benefits plan, Form S-8 will continue to be
available for the sale of shares upon exercise of such options notwithstanding
the fact that the employment of an option holder may have terminated before the
options are exercised. Virtually all employee stock options provide for continued exercisability for
some period of time after retirement or death, and most provide for
exercisability following other termination of employment. The period of such
continued exercisability varies from plan to plan, and even from option to
option, depending on a number of factors. For example, a concern over short-term
volatility in stock prices and a sense that employee efforts are often reflected
only in long-term stock-price trends have led many companies to conclude that
the personal efforts stock options are intended to encourage may not bear fruit
in the form of enhanced share value until well beyond termination of an
employee's service to the company. Other companies have been concerned about the
impact termination of employment could have on employees' financial planning
and, in today's climate of business restructurings, the often arbitrary
treatment afforded employees whose employment is terminated as a result of the
reorganization, discontinuance or sale of a portion of a company's business. As
a result, many plans now permit continued exercisability of stock options for
significant periods of time after termination of employment. Public policy has long favored the use of stock options as a compensation
device. Form S-8 promotes that policy by providing an efficient and relatively
inexpensive method for issuers to satisfy the registration requirements of the
Securities Act of 1933. The Subcommittee believes that public policy is
similarly served by continuing the availability of Form S-8 for sales to option
holders whose employment with the issuer has terminated. The alternative of
requiring an issuer to establish and maintain a second registration statement on
another form would be burdensome both in terms of cost and the administrative
difficulties attendent to maintaining the "evergreen" status of another
registration statement. Whether or not an optionee is an employee, he or she
would, of course, continue to receive all of the shareholder materials provided
for in the Form S-8 undertakings. In the
Boulevard Bancorp. Inc. no-action letter (avail. Nov. 6, 1987), the staff
indicated that Form S-8 would be available for the exercise of transferable
warrants for a period of 90 days after termination of the warrant holder's
employment. The Subcommittee is of the view that the implied 90-day limitation
in the Boulevard Bancorp. letter should not be extended to non-transferable
stock options granted, pursuant to employee stock plans. When a company issues
freely transferable warrants, it makes an implicit undertaking to register the
underlying shares on a form other than Form S-8 when the warrants are
transferred to non-employees. No such implicit undertaking is present when
non-transferable stock options are granted since only employees (or their
estates or beneficiaries) are permitted to exercise non-transferable options. In the Boulevard Bancorp. letter, the staff recognizes, at least implicitly,
that the language of Form S-8 does not prevent the use of that Form to issue
shares to former as well as current employees. The question is whether as a
policy matter the staff, in interpreting the Form, should impose a time limit on
its use following termination of an optionee's employment. In light of the
substantial variations in practice in this area and the need for companies to
have flexibility in their treatment of terminated employees, the Subcommittee
would urge the staff not to impose any such limit, at least in the case of
non-transferable options granted under employee benefit plans to option
recipients who were employees when the options were awarded. This result is
consistent with the approach adopted by the Commission earlier this year in Rule
701, which provides an exemption for offers and sales of shares upon exercise of
non-transferable employee stock options without regard to whether the optionee
continues to be an employee at the time of exercise. The Subcommittee, therefore, hereby requests that the staff confirm that Form
S-8 will continue to be available for sales of shares upon exercise of
non-transferable options granted to employees pursuant to stock options plans,
even though at the time of exercise the option holder may no longer be an
employee of the issuer. If you have any questions or would like to discuss this matter with the
undersigned (617-423-6100) or other members of the Subcommittee, please let me
know. I would appreciate it if you would send a copy of your reply to me at my
office (c/o Ropes & Gray, 225 Franklin Street, Boston, MA 02110). Sincerely, Donald W. Glazer
Co-chairman, Subcommittee
on Employee Benefits
and Executive
Compensation. Enclosures STAFF REPLY LETTERFebruary 14, 1989 Donald W. Glazer, Esq.
Co-Chairman, Subcommittee on Employee
Benefits and Executive Compensation
American Bar Association
c/o Ropes & Gray
225 Franklin Street
Boston, Massachusetts 02110 Dear Mr. Glazer: This is in response to your letter of November 23, 1988 concerning the
availability of the Form S-8 registration statement for certain exercises of
stock options. It is the Division's view that Form S-8 is available for the sale of an issuer's
securities upon the exercise of non-transferable stock options granted to
employees pursuant to an employee benefit plan notwithstanding the fact that the
employment of the option holder may have terminated before the options are
exercised. Our view in this regard is conditioned upon the fact that the
exercise will be pursuant to the terms of an employee stock option plan that
specifically provides for the continued exercisability of the options for a
period of time after retirement, death or other termination of employment. Sincerely, William E. Morley
Chief Counsel
Associate Director (Legal)
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