American Society of Corporate Secretaries
521 Fifth Avenue
New York, New York 10175
April 17, 1998
Jonathan G. Katz, Secretary
Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Comments on Release No. 33-7506; 34-39669 (File No. S-7-2-98)
Dear Mr. Katz:
On behalf of the American Society of Corporate Secretaries, Inc. we are pleased to have the opportunity to respond to the Commission's request for comments on proposed amendments, set forth in Release No. 33-7506; 34-39669 (the Release), to Form S-8 and related rules under the Securities Act and Regulations S-K and S-B to restrict the use of that form for the sale of securities to consultants and advisors and to allow the use of that form for the exercise of stock options by family members of employee-optionees.
The Society' has over 3,750 members who represent approximately 2,500 corporations in the United States and Canada, ranging from the largest multinational industrial companies to start-ups and other small companies. These members have among their prime responsibilities participation in the design, implementation and administration of stock option and other stock-based employee benefit programs, including particularly assuring compliance with the registration requirements of applicable Federal, state and foreign securities laws and regulations.
We commend and fully support the Commission's proposal to amend the Form S-8 to permit its use for the registered sale of securities to a limited class of inter vivos transferees (as well as the legatees and heirs) of employee-optionees. While the rule as proposed, will enable registrants to accommodate many employee-optionees' legitimate estate planning objectives, we recommend broadening the class of inter vivos transferees in donative transactions so that inter vivos gifts may be made to the same broader class of legatees and heirs whose exercises using the Form S-8 following the death of the employee have long been permitted under General Instruction A to Form S-8.
We recognize the Commission's proper concern with preventing possible misuse of Form S-8 for capital-raising sales of securities to the general public without appropriate disclosure or for compensatory arrangements with promoters engaged to push the registrant's securities or with market makers for its securities. We believe, however, that the proposals in the Release intended to deter such abuses sweep too broadly and may inhibit legitimate use of the Form S-8 to register compensatory programs important to the success of start-ups and other small-capitalization registrants. We also suggest that the form be broadened to include independent insurance agents in the definition of "employee" since these agents work closely with the companies they represent and certainly have as much knowledge about the issuer they represent as would a consultant or other advisors who are now permitted to use the Form S-8 . We urge the Commission to adopt alternative approaches to deter abuse or misuse of Form S-8.<
Transferable Stock Options
As proposed, the amendments to Form S-8 and related rules and regulations proposed in the Release would facilitate the use of transferable stock options in the principal situations in which issuers have so far used them, in spite of the attendant complexities, to enable employee-optionees to accomplish their legitimate estate planning objectives. Accordingly, we fully support those proposed amendments.
We believe, however, that the Form S-8 should be made available for the broadest range of transferable stock options that is consistent with the investor protection purposes of the federal securities laws even though few issuers may choose to avail themselves of the full scope of permitted transferability. Issuers should be accorded the flexibility to decide for themselves to what extent permitting employee-optionees to transfer stock options during their lifetime is consistent with the purposes of the issuers' stock incentive programs and not unduly burdensome to administer.
To that end, we urge the Commission to modify the proposed amendments so as to make Form S-8 available for registration of exercises of stock options, and underlying issuer stock deliverable upon exercise of stock options, transferred or transferable by gift or pursuant to a domestic relations order to any individual beneficiaries, to trusts principally for their benefit, to corporations, partnerships or other legal entities owned principally by them or to charities. This formulation would obviate the need to list exhaustively in the General Instructions and the related rules and regulations all the legal relationships deemed to be sufficiently close to the employee-optionee to be considered "immediate family" and thus eligible to rely on a Form S-8. It would instead leave it to issuers and plan administrators to determine for themselves and in the context of their own specific circumstances, how distant, in this age of extended families, the relationship of a donee to the employee-optionee maay be without conflict with the objectives of its stock incentive programs or undue administrative burden.
This concept is consistent with the present provisions of the General Instructions to Form S-8, which have long included within the definition of "employee" for purposes of registration of employee benefit plan stock options "executors, administrators or [any] beneficiaries of the estates of deceased employees." Since one of the principal objectives of the proposed amendments is to facilitate legitimate estate planning, the amendments should enable issuers to allow employee-optionees to make inter vivos transfers to as broad a class of beneficiaries as they could in their wills without foregoing the availability of Form S-8.
Moreover, permitting any beneficiary of a gift of employee stock options to rely on Form S-8 in connection with exercise of those options is consistent with the investor protection purposes of the federal securities laws. As noted in the Release, employees' familiarity with the business of the issuer through the employment relation, together with the compensatory purpose of the grant of employee stock options, has justified the abbreviated disclosure format of the Form S-8. One may presume that family members and other individual beneficiaries to whom the options may be given would have access to the employee-optionee's knowledge of the issuer's business and copies of the issuer's 1934 Act disclosure documents. Charities would have access to investment advisers and 1934 Act disclosure documents.
To respond to the Commission's requests for comment on other specific matters:
If the expansion suggested in this letter is not adopted, the categories of relationships should be broadened and specifically should include domestic partners as well as spouses and other family members, including those relationships specifically noted in the Release.
While the purposes of the definitions of "immediate family" for Section 16 and Form S-8 are different, the former going to control and the latter to access to information, the same definition could be used in both contexts. We note that the presumption that a reporting person has a pecuniary interest in securities owned by a member of his or her immediate family sharing the same household is rebuttable.
We believe options transferred for value generally should not be covered by Form S-8 since permitting such transactions could lead to development of a secondary market (albeit limited) in employee stock options. If the transfer were fundamentally a donative transaction in which some value passed to the employee-optionee, for example, a net gift in which the donee pays the gift tax, the donee should be permitted to rely on a Form S-8 registration statement in exercising the stock option and selling the underlying shares.
If the expansion suggested in this letter is not adopted, trusts primarily for the benefit of family members - rather than exclusively for their benefit - should be entitled to rely on Form S-8 so as to accomplish the estate planning purpose of the common "family trust" entity that may contemplate some ultimate distributions to persons or entities who are not family members.
Consistent with our general views, the broadest range of entities that might be used for legitimate estate planning purposes should be entitled to rely on Form S-8 in exercise of an assigned stock option.
If the expansion suggested in this letter is not adopted, no distinction should be made whether family members acquire employee stock options directly or indirectly from the employee-optionees. Issuers should be able to decide for themselves whether the record-keeping requirements resulting from permitting further assignments of stock options are too burdensome.
If reload options are issued directly to the assignee, the assignee should be entitled to rely on Form S-8.
The scope of Form S-8 should be the same for employee stock options and for the underlying shares deliverable upon exercise.
The scope of Form S-3 availability should be the same for shares underlying options and warrants. There should be no distinction depending on whether the instrument is transferable.
A clarification to Instruction 3 to provide specifically that options granted and subsequently assigned should be shown in the Summary Compensation Table and the Option/SAR Grants Table would be desirable.
We believe that transferability itself is not necessarily a material option term that should require footnote disclosure in the Options/SAR Grant Table. If, however, the Commission's Staff is of the view that disclosure of transferability is always required, the rule should be amended; otherwise, it becomes a trap for the unwary. Any further disclosure, such as whether the option has been assigned and, if so, the date of assignment and the name or status of the transferee, should not be required but left to the issuer's discretion.
No amendment of the Option Exercises and Year-End Value Table should be necessary. Options assigned to persons whose security ownership is imputed to the officer should be included in accordance with Rule 13d-1, and options assigned to persons whose security ownership is not imputed ought not be required. When assigned options are included (or exclusion of assigned options is footnoted), neither the identity nor a generic description of the identity of the assignee should be required. Such disclosure would hardly seem material in disclosing compensation.
The abuses of Form S-8 described in the Release - using purported "consultants" as conduits to distribute the issuer's securities to the general public or using "consultants" to promote the issuer's securities by disseminating materially fraudulent information - appear on their face to be clear violations of the present provisions of the Securities Act and the rules thereunder, including the General Instructions for the use of Form S-8. It seems unlikely that persons who have been undeterred by the existing provisions, such as the requirement to certify that the registrant has reasonable grounds to believe it meets all the requirements for the use of Form S-8, would be deterred by many of the new requirements proposed in the Release.
Nor would these new requirements appear to aid the Commission's enforcement effort sufficiently to justify the burdens imposed on those companies, often start-ups and small-capitalization companies, that in the ordinary course of their business routinely employ consultants whom they compensate largely with stock.
We would urge the Commission to consider alternative approaches to deter the perceived abuses by limiting the volume of securities registered on a Form S-8 that may be transferred to consultants to a fixed percentage of the outstanding securities of that class, requiring a short waiting period, such as 10 days, for effectivity of Forms S-8 when used to register securities for issuance to consultants and requiring a check-mark on the cover page (and an electronic tag in the header) of those Forms S-8 to identify them for potential Staff review. An additional undertaking to the Form S-8 could also be added to require registrants of securities that may be transferred to consultants to provide supplementally such additional information as the Staff may need to identify situations in which use of the Form S-8 to register the securities is inappropriate.
We would further urge the Commission either to defer or to clarify the proposed amendment excluding consultants who provide services that "directly or indirectly promote . . . the registrant's securities" from the definition of employees for purposes of Form S-8. As proposed, that amendment introduces further ambiguity and uncertainty into the scope of Form S-8 for programs benefiting consultants. For example, a public relations consultant engaged to promote a company's name or image generally or an important product could be considered to be engaged "indirectly" in promoting the registrant's securities although such a result surely was not intended. Clarification is also needed to assure that director option plans are not tainted by labeling the directors as consultants.
To respond to the Commission's request for comment on other specific matters:
We believe the differences between the definition of consultants and advisors for purposes of Rule 701 and Form S-8 are appropriate in view of the restriction on resale of securities acquired in reliance on Rule 701.
On the surface, removing the presumption of use of the proper form for forms that become effective automatically upon filing may seem reasonable since the Staff has no opportunity to object to the form used. That change, however, would deprive honest registrants, who constitute the bulk of the filing universe, the certainty that their transactions will not be challenged after the fact. It is important to registrants to be confident that they may distribute plan documentation and proceed with awards under a plan without fear of being required later to rescind any benefits granted and reoffer the plan under a registration on a different form. As indicated above, we believe it would be preferable to reinstitute a short waiting period in cases where the plan permits the issuance of stock or options to consultants. This waiting period would effectively allow the Commission Staff an opportunity to object to an improper use of Form S-8 while providing certainty to registrants whose filings were not challlenged.
While the requirements to name all consultants to whom securities would be transferred, the number of securities that would be transferred to each and to describe specifically the services each consultant would provide might have a chilling effect on the abuse of Form S-8 to conduct a disguised public distribution, those requirements would unduly burden registrants seeking legitimately to use Form S-8 for compensatory arrangements with consultants. It should be sufficient to require such disclosures only when the aggregate amount of securities to be transferred to consultants pursuant to a Form S-8 exceeds a threshold, such as transfer to any one consultant of more than 1% of the outstanding securities of the same class or transfer to all consultants of more than 10% of the outstanding securities of the same class.
In general, the issuance of securities to consultants as compensation for bona fide services rendered should not be of sufficient importance to require reporting in a Form 10-K, 10-Q or 8-K unless the aggregate issuance for that purpose exceeds a threshold, such as 5% of the outstanding securities of the same class, during a one-year period. Reporting on a Form 8-K should be required only if a transaction or series of transactions is of sufficient magnitude to be material to the financial statements of the registrant.
We would not object to a requirement that registrants specifically certify as to the bona fide nature of consultants' or advisors' services since such a certification would underline the Commission's intent to limit use of the Form S-8 to consultants who provide bona fide services.
There would seem to be no need to file each consulting or advisory agreement as an exhibit to the Form S-8 if the rule provides for volume or other limitations designed to stem abuse. Many of these agreements contain confidential, competitive information which , if disclosed, could cause the issuer and the consultant competitive harm.
Should the Commission or its Staff have questions concerning the comments in this letter or desire additional information to assist it in preparing the proposals in the Release for adoption, please do not hesitate to contact us.
Very truly yours,
D. Craig Nordlund
Chairman, Securities Law Committee
cc: Brian Lane, U.S. Securities and Exchange Commission
Mauri Osheroff, U.S. Securities and Exchange Commission
Carol Strickland, Chairman, American Society of Corporate Secretaries
Karl R. Barnickol, Chairman-Elect, American Society of Corporate Secretaries
David Smith, President, American Society of Corporate Secretaries
ASCS Subcommittee on Form S-8: