Laura G. Thatcher Direct Dial: 404-881-7546 E-mail: firstname.lastname@example.org
April 27, 1998
Jonathan G. Katz
Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Comments on Release No. 33-7506, File No. S7-2-98 (February 17, 1998)
Ladies and Gentlemen:
This firm represents a number of public and private corporations who sponsor stock option plans and otherwise use equity-based forms of compensation. This letter is in response to the staff's solicitations of comments on the Proposed Rule concerning registration of securities on Form S-8, as described in Release Number 33-7506, File Number S7-2-98, issued on February 17, 1998.
We applaud the Commission's decision to make Form S-8 available for transferable options to facilitate gift and estate planning opportunities. While we also are in favor of efforts to prevent abuses of Form S-8 to in capital-raising and stock promotion activities, we are concerned that the proposed protective measures make compliance too difficult for companies who legitimately use Form S-8 to compensate consultants and advisors.
In Release No. 33-7506, commenters are asked to respond to a number of specific questions about topics addressed in the release. Set forth below are our comments with respect to some of such questions.
I. Specific Questions Raised in Release 33-7506 Concerning Proposed Changes Related to "Consultant Abuses"
1. Should the Commission simply amend Form S-8 so that it is no longer available at all for the issuance of securities to consultants and advisors? No, we believe that perceived abuses can be curtailed through less drastic measures. In many instances, it is entirely appropriate to grant compensatory and incentive equity-based awards to consultants and advisors who are not engaged in capital-raising efforts.
2. Should the meaning of consultant or advisor for the purpose of Form S-8 conform with the less restrictive approach under Rule 701? We believe so. As long as the proposed changes are made to General Instruction A.1(a) to Form S-8 to clarify that the consultant or advisor must provide bona fide services that do not directly or indirectly promote or maintain a market for the registrant's securities, we see no reason that the S-8 definition of "consultant and advisor" should not be interpreted to conform with the less restrictive approach under Rule 701. Why should a public company be prohibited from using Form S-8 for compensatory or incentive awards, for example, to physicians who contract to provide medical services pursuant to managed care arrangements, or to franchisees, or to independent sales representatives? Why is it critical that the compensation paid by the company for such services be the primary source (or any specific percentage) of the consultant's income? To build in such a "numbers" test adds a level of complication to the process, without any clear nexus to the evil that is sought to be avoided (i.e., the use of Rule 701 or Form S-8 for capital-raising and stock promotion activities).
3. If so, should Form S-8 be amended to remove the specific requirement that insurance agents be "exclusive" given that independent insurance agents are eligible participants in a Rule 701 plan? Yes.
4. If so, should independent insurance agents and other independent sales representatives be required to derive a specified minimum percentage of income from the company in order to qualify for both Rule 701 and Form S-8? No. Again, this measure seems to have no nexus to the evil that is sought to be avoided (i.e., the use of Rule 701 or Form S-8 for capital-raising and stock promotion activities).
5. Is there good reason to interpret "consultant or advisor" more narrowly for purposes of Form S-8 because it results in the issuance of freely-tradable registered securities, whereas Rule 701 results in the issuance of restricted securities? If the Commission is not inclined to follow the Rule 701 approach for purposes of Form S-8 (as encouraged above), we believe that there is justification for maintaining the more liberal interpretation of "consultants and advisors" in the Rule 701 context, not only because the securities are restricted, but also because, given the current limits of Rule 701 (which we understand are proposed to be liberalized), non-public companies are already significantly constrained in their ability to use equity-based compensation for fully legitimate purposes.
C. Disclosure of Information Concerning Consultants and Advisors
1. Will the proposal reduce the likelihood of securities being sold on Form S-8 to "consultants" who act as statutory underwriters, or otherwise promote or maintain a market for the registrant's securities? Undoubtedly, but it may go further than is necessary, as discussed below.
2. Are there any specific circumstances under which the disclosures required would not be warranted, or would create difficulty? Would any specific compensatory practices be impeded? How should the proposal be tailored to alleviate any inappropriate burdens, while retaining its prophylactic effect? In the context of a broad-based plan that is available for compensatory and incentive awards to employees, consultants and advisors generally, it is highly unlikely that the names of specific grantees will be known at the time of the filing of the S-8. The time and expense involved in filing a post-effective amendment each time a grant is made to a consultant or advisor would significantly deter the use of valid compensatory awards to consultants and advisors. We think that abuses can be effectively curtailed by a requirement that the issuer report in its 1934 Act reports the number of awards made to consultants and advisors in the last quarter, without naming them.
3. Should the cover page to Form S-8 include a box that a registrant would be required to check if any of the securities registered are to be offered and sold to consultants or advisors? If so, should filers be required to include an electronic "tag" in the header of EDGAR filings or other electronic means of identifying this information? We think this is a good idea which may serve to minimize potential abuses.
4. Should registrants be required to file consulting and advisory contracts as exhibits to Form S-8? We think not. There may be many circumstances in which there is no written contract. A requirement that the issuer be prepared to provide the Commission copies of any written contracts would be fine. Of course, if the contract arises to the level of a "material contract" it must be disclosed in the 10-Q and 10-K in any event.
5. Should the certification on Form S-8 be expanded to require the registrant, or an officer of the registrant, to certify specifically that any consultant or advisory who will receive securities under the registration statement is not hired for capital-raising or promotional activities? This is fine, but seems redundant, since the officer must already certify that the securities are eligible to be registered on Form S-8.
6. In addition to, or substitution for the proposed amendments to Part II of Form S-8, should companies be required to disclose issuances of securities to consultants and advisors that occurred during the most recently completed fiscal quarter in their Exchange Act annual and quarterly reports? If so, should the names of the recipients and amounts of securities be included? A disclosure that a certain number of securities were issued to consultants or advisors would be fine. We think that a requirement that the names be given is unwarranted both from a benefits/burden standpoint and the legitimate need to preserve confidentiality for business reasons.
7. Are the issuances of securities to consultants and advisors of sufficient market significance that their disclosure instead should be required in a Form 8-K? No.
D. Percentage of Securities Registrable on Form S-8
1. Should the Commission adopt a rule to limit the aggregate percentage of securities that may be sold to consultants or advisors pursuant to Form S-8 during the registrant's fiscal year? No. Would such a limit prevent the abuse of Form S-8 to conduct unregistered public offerings? Probably not.
2. If such a limitation were adopted, should a different standard apply to companies in industries (such as computer technology) that rely extensively on the services of consultants in the ordinary conduct of their business? This would be very difficult to define, as industries change over time (often rapidly). To be fair, it would need to be a very thoughtful and specific definition.
II. Specific Questions Raised in Release 33-7506 Concerning Transferable Options and Proxy Reporting
A. Form S-8 Availability for Family Member Transferees
1. Should other relatives, such as nieces and nephews be added to the Form S-8 definition of "family member" particularly to facilitate estate planning transfers to these people? Yes.
2. Should these relatives also be added to the Rule 16a-1(e) definition of "immediate family" so that a Section 16 insider would be deemed to have an indirect pecuniary interest in securities that are held by these persons if they share the insider's household? No. The universe of people to whom it may be desirable to transfer wealth for estate planning purposes is not co-extensive with the persons over whom the donor has control or otherwise necessarily shares a pecuniary interest in the issuer's securities.
3. Should Form S-8 be available to "family members" of any person who satisfies the Form S-8 definition of "employee," including consultants and advisors even though consultants and advisors have more remote connections to the registrant than do traditional employees? Yes.
4. Do the "consultant abuses" discussed above justify limiting the proposal to "family members" of traditional employees? No. The other proposed changes should take care of such abuses.
5. Should Form S-8 be available for the exercise of any option transferred for value to a "family member"? Yes. There may be situations in which a transfer for value makes sense for estate planning purposes and there is no reason to limit such opportunities based on the availability of S-8.
6. In addition to trusts for the exclusive benefit of family members, should Form S-8 be made available to any other entity solely owned by "family members" as proposed, or should only entities other than trusts that are used for estate planning purposes, such as limited partnerships, specifically be permitted? Yes, as proposed.
7. Is the limitation to entities solely owned by "family members" too restrictive for legitimate estate planning purposes (e.g. should Form S-8 be available for the exercise of options transferred by gift by the employee to a charity)? While it is unclear that gifts of options to charities are desirable under current tax laws, there may be situations in which they do and there is no reason to limit such opportunities based on the availability of S-8.
8. Would making the form available for options transferred indirectly from employees impose burdensome recordkeeping obligations on issuers? Yes.
B. Technical Change to Form S-8 to Allow Registration of Shares Underlying Transferable Options
1. Is unlimited transferability appropriate for option shares registered on Form S-8? We think not.
D. Executive Compensation Disclosure of Transferred Options
1. Is it necessary and/or desirable to amend Item 402(b)(2)(iv)(B) to state that the sum of the number of securities underlying stock options granted required to be reported in column (g) of the summary compensation table includes options that subsequently have been transferred by the officer? Yes.
2. Should Instruction 3 to Item 402(c) be amended to include transferability among the material terms requiring footnote disclosure in the Option/SAR Grants Table? Yes.
3. Should the instructions to the Option/SAR Grants table also be amended to require footnote disclosure that specifies the date of any transfer of an option or SAR that has occurred? That may be more specific than is necessary.
4. Should such a footnote require that a transfer be characterized as "donative" or "for value received"? No. Why is this relevant to shareholders?
5. Should the footnote name a family member - or any other - transferee? No. This seems unduly invasive of privacy with no corresponding benefit to shareholders.
6. Alternatively, would generic disclosure of the transferee's status, such as an "immediate family member" or "unaffiliated charity" be sufficient? Better, but why necessary?
7. Should a similar footnote description of transfers also be required in the summary compensation table, so that disclosure will be required of transfers that take place in the two years following the year in which an option is granted? OK.
8. Should a new instruction be added to Item 402(d)(2) to require that options and SARs exercised or held by a "family member" of the named executive officer be included in the table? Yes.
9. If so, should the family member be named in a footnote to the table? No.
Laura G. Thatcher