Securities Exchange Act of 1934 — Section 16

March 20, 1992

Response of the Office of Chief Counsel
Division of Corporation Finance

You have asked the Division questions about the application of the rules under Section 16 of the Securities Exchange Act of 1934 to the Company 1986 Stock Option Incentive Plan (the "Option Plan") as proposed to be amended (the "Amended Option Plan").

Under the Option Plan, a committee of disinterested persons (the "Committee") can grant options, stock appreciation rights and restricted shares. The Option Plan expressly permits restricted shares to be granted in settlement of awards made under the Company Management Incentive Plan II (the "MIP II Plan").

The Company proposes to amend the Option Plan (the "Amendment") to provide express authority for the Committee to grant restricted shares in settlement of awards (the "EVS Awards") under the Executive Value Sharing Plan (the "EVS Plan"). The EVS Plan would operate under and as a part of the Amended Option Plan.

Under the MIP II Plan, the Committee selects participants to receive awards (the "MIP II Awards") whose value is tied to stock price appreciation and dividends over a three-year period as compared to a peer group of companies. The Committee decides the extent to which the MIP II Awards are settled in cash or restricted shares. When a MIP II Award is settled in restricted shares the awardee receives a number of shares equal to the quotient of the MIP II Award's value divided by the fair market value of the Company common stock (the "Common Stock") on the date next preceding the settlement date. The restricted shares are issued not less than six months after the date following the settlement date on which the awardee agrees to restrictions on the shares. The MIP II Plan operates under and as a part of the Option Plan.

Under the EVS Plan, the Committee selects participants to receive EVS Awards whose value is tied to increases in the Company's book value over a three-year period ending on a December 31 (a "Performance Cycle"). Between the March 1st through March 15th, inclusive, immediately following the end of the Performance Cycle, the Committee decides the extent to which EVS Awards are settled in cash and/or restricted shares (the "Allocation Date").

To the extent that an EVS Award is settled in restricted shares, the number to be received is determined by a formula. Pursuant to the formula, the number is the quotient of (1) the value of the part of the EVS Award being settled in restricted shares divided by (2) the average of the fair market value of the Common Stock as of the close of the business day immediately preceding January 1, February 1 and March 1 of the fiscal year following the end of the Performance Cycle. The restricted shares are issued no earlier than six months after the date after the Allocation Date on which the awardee signs an agreement imposing restrictions on the shares.

Based on the facts presented and assuming that the Option Plan otherwise complies with Rule 16b-3, the Division is of the following views.

1. Rule 16a-1(c)(5), which excludes "interests or rights to participate in employee benefit plans of the issuer" from the term "derivative securities," extends to the right to participate in the EVS Plan.
    
2. The Amendment does not require shareholder approval because it provides benefits comparable in nature and amount to those already provided by the Option Plan.
    
3. Even to the extent an EVS Award is to be settled in restricted shares under the Amended Option Plan, it need not be reported as a derivative security under Rule 16a-1(c) (the "Derivative Security"). Instead, an awardee may report that restricted shares are acquired on the Allocation Date. Cf. Becton Dickinson and Company (November 6, 1991). Alternatively, an awardee may report that a Derivative Security is acquired on the Allocation Date. At that time, the EVS Award's value is tied to the market price of the Common Stock to the extent it is to be settled in restricted shares because the awardee has a right to a fixed number of restricted shares. Prior to that time, the EVS Award's value is not tied to any extent to the market price of the Common Stock or any other Company equity security.
    
4. To the extent an EVS Award is not to be settled in restricted shares under the Amended Option Plan, it is not and will not become a derivative security under Rule 16a-1(c) because its value is not and will not become tied to the market price of the Common Stock or any other Company equity security.
    
5. Where an awardee reports that restricted shares are acquired on the Allocation Date, the acquisition is eligible for exemption from Section 16(b) under Rule 16b-3. The subsequent issuance of restricted shares so reported would have no consequences to the awardee under Section 16.

Alternatively, where an awardee chooses to report that a Derivative Security is acquired on the Allocation Date, the acquisition eligible for exemption from Section 16(b) under Rule 16b-3. The subsequent issuance of restricted shares to such an awardee is the settlement of the Derivative Security and is exempt from Section 16(b) under Rule 16b-6(b), but should be reported as required by Rule 16a-4.

Because these positions are based on the representations made to the Division in your letter, it should be noted that any different facts or conditions might require a different conclusion.

Incoming Letter:

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/corpfin/cf-noaction/lincoln032092-sec16.htm