| at-the-money option |
| An option with an exercise price equal to the current
market price. |
|
| backend loaded stock options |
| Options that vest at a time close to when the options
expire. |
|
| blank check preferred stock |
| A popular term for preferred stock in which the
board is given broad discretion to establish voting, conversion,
dividend, and other rights of preferred stock at the time the board
issues the stock. Some boards that have authority to issue blank
check preferred stock have used it to create takeover defenses. |
|
| bonus shares |
| Share awards which in some cases may not vest until
various performance goals are met or the employee has remained with
the company for a mini-mum number of years. |
|
| bylaw |
| Bylaws supplement each company's charter, spelling
out in more specific detail general provisions contained in the
charter. Boards often have the power to change bylaw provisions
without shareholder approval. |
|
| call option |
| The right, but not the obligation, to buy shares
at a predetermined exercise price before a predetermined expiration
date. Holders are rewarded when the option has a "positive" spread,
or difference between its exercise price and its market price. |
|
| change-in-control provision |
| A provision in a stock option plan that allows for
immediate vesting of outstanding options if certain events take
place which may be deemed a change in control, such as the purchase
of a majority of the company's outstanding shares by a third party. |
|
| charter |
| Also known as the articles of incorporation, the
charter sets forth the respective rights and duties of shareholders,
officers, and directors. The charter constitutes the fundamental
governing rules for each company. Shareholder approval is required
to amend a company's charter. |
|
| classified board |
| A classified board is a board that is divided into
separate classes, with directors serving overlapping terms. A company
with a classified board usually divides the board into three classes;
each year, one-third of the directors stand for election. A classified
board makes it difficult to change control of the board through
a proxy contest, since it would normally take two years to gain
control of a majority of board seats. |
|
| cliff vesting |
| A plan feature providing that all awards vest in
full after a specified date. If the employee leaves the company's
employ prior to the vesting date, no partial vesting will occur. |
|
| confidential voting |
| Also known as closed voting or voting by secret
ballot, under confidential voting procedures, all proxies, ballots,
and voting tabulations that identify shareholders are kept confidential.
Independent vote tabulators and inspectors of election are responsible
for examining individual ballots, while management and shareholders
are only told vote totals. |
|
| corporate governance |
| Corporate governance is the framework within which
companies exist. Its focus is the relationship among officers, directors,
shareholders, stakeholders, and government regulators, and how these
parties interact to oversee the operations of a company. |
|
| cumulative voting |
| Normally, shareholders cast one vote for each director
for each share of stock owned. Cumulative voting permits shareholders
to apportion the total number of votes they have in any way they
wish among candidates for the board. Where cumulative voting is
in effect, a minority of shares may be able to elect one or more
directors by giving all of their votes to one or several candidates. |
|
| deferred stock |
| Stock grants in which a plan participant is promised
a specified amount of shares, granted at no cost, if he remains
employed with the company for a specified period of time. The recipient
does not have voting rights and does not receive dividends on the
shares until the deferred award is actually made. Typically the
dividends cumulate during the vesting period. |
|
| dilution |
| A decline in the relative ownership interest that
occurs when a company increases the number of shares outstanding.
Dilution can affect voting power as well as earnings per share and
dividends. |
|
| discretionary option grants |
| Pay programs in which the compensation/administering
committee has the discretion to grant options and also issue reloads
on those options. |
|
| divisional or unbundled incentive compensation plans |
| Plan participants are rewarded based on the performance
of their division or business unit, rather than based on the performance
of the company as a whole. |
|
| employee stock purchase plan |
| A plan qualified under Section 423 of the IRS Code,
which allows employees to purchase shares of stock through payroll
deductions. |
|
| employee stock ownership plans (ESOP) |
| An employee benefit program under which the company
contributes a portion of its stock to an employee trust, usually
as a form of profit sharing. Variants of these sorts of plans are
the stock bonus plan, the leveraged stock bonus plan (where the
trust can borrow money from lending sources to buy more stock),
and matching ESOPs (in which employees match the contribution that
the company makes). ESOPs and their variants have value as tax-deferral
devices for employees and as tax deduction vehicles for employers. |
|
| equity ownership plans |
| A generic term for any type of plan that promotes
employee ownership. Equity ownership plans may include employee
stock ownership plans, stock option plans, stock purchase plans,
or a variety of other plans. |
|
| evergreen plan |
| A plan provision that typically increases the number
of shares available for issue under the plan on an annual basis
by a predetermined percentage of the company's common stock outstanding.
Such plans often have no termination date and permit the plan to
operate indefinitely without further shareholder approval. |
|
| exercise price |
| The price at which a stock option may be exercised.
This price may be above (premium priced) or below (discounted) the
current or projected future price of an option grant. Exercise prices
may be fixed, based on a formula or variable. |
|
| fair price requirements |
| Fair price requirements compel anyone acquiring
control of a company to pay all shareholders the highest price that
the acquirer pays to any shareholder during a specified period of
time. Fair price requirements may be included in a company's charter,
or in state business incorporation statutes. Fair price requirements
are intended to deter two-tier tender offers in which shareholders
who tender their shares first receive a higher price for their shares
than other shareholders. |
|
| formula-based stock incentive plan |
| A plan whereby an executive receives phantom stock
(see definition below) which is not publicly traded. The value of
these shares is derived through a formula, which is normally based
on accounting variables. This form of compensation is very much
like a performance share or performance unit plan. |
|
| golden parachutes |
| A popular phrase for severance agreements that provide
generous benefits to top executives who are fired or who resign
following a change in management control. Some golden parachutes
can be deployed even without a change in control if a potential
acquirer crosses a specified ownership threshold. |
|
| greenmail |
| Greenmail refers to the practice of repurchasing
shares from a bidder at an above-market price in exchange for the
bidder's agreement not to acquire the target company. Greenmail
is widely considered to be a form of blackmail. Some companies have
attempted to deter greenmail by adding antigreenmail provisions
to their charters. |
|
| gun-jumping grants |
| Grants of awards made under a plan or plan amendment
prior to shareholder approval of the plan or amendment. |
|
| incentive stock options (ISOs) or qualified stock
options |
| Stock option grants that meet the requirements established
by Section 422A of the Internal Revenue Code. For such option grants
to qualify as ISOs, the optionee must be an employee, the stock
option plan must be approved by shareholders, the option term cannot
exceed ten years, and the option price must be equal to or greater
than 100 percent of fair market value at grant date. Such grants
are not taxed until the stock is sold. |
|
| indemnification |
| Indemnification permits companies to reimburse officers
and directors for expenses they incur as a result of being named
as defendants in lawsuits brought against the company. Indemnification
often covers judgment awards and settlements as well as expenses.
Without indemnification, or directors' liability insurance, most
companies would be unable to attract outside directors to serve
on their boards. |
|
| indexed option |
| The right, but not the obligation, to purchase shares
at an exercise price that periodically adjusts upward or downward
in relation to a market or industry indicator. |
|
| industry-indexed options |
| Option plans in which the exercise price of an at-market
grant adjusts upward or downward for each period (typically a quarter)
based on the average performance of an industry peer group. Under
these plans, participants are rewarded only for above-average stock
price performance. |
|
| in-the-money |
| A situation in which an underlying stock is trading
above the option's strike (exercise) price. |
|
| junior stock |
| A variation of restricted stock whereby a company
seeks to depress the initial value of the stock by design, yet leave
the employee with the upside potential of the company's regular
common stock. |
|
| limited stock appreciation rights (LSARs) |
| Rights that are used in the event of a change in
ownership or control. Usually granted in tandem with incentive stock
options and nonqualified stock options, LSARs allow the holder to
receive the difference between the exercise price and market price
of an option without having to make a personal cash outlay to exercise
the option. The design of these rights permits the recipient to
receive the higher offer price in a two-tier tender offer. In many
cases, LSARs are granted only to insiders (as defined by the SEC)
because insiders are prohibited from selling shares within six months
of a share purchase. The latter applies even if the company is in
the midst of a tender offer or other event impacting a company's
ownership or control. |
|
| megagrants/super options |
| Very large grants of stock options given to key
executives. These large option grants are usually granted to offset
a low base salary in a company that has the potential for significant
future growth. |
|
| nonqualified stock options (NSOs) or nonstatutory
stock options |
| Stock option grants that do not qualify for tax-favored
status. The option exercise price of such awards can be set above
or below 100 percent of fair market value at grant date, and the
term of such awards can be longer or shorter than ten years. Such
grants are taxable to the recipient in the year the options are
exercised. The option spread is deductible by companies for tax
purposes, allowing the company to take the tax deduction at the
time the recipient receives the option income. Some companies permit
an exercise price as low as par value, or just pennies per share
in certain cases, while other companies allow the compensation committee,
at its sole discretion, to set the exercise price of NSOs. |
|
| omnibus plan |
| A stock-based incentive plan providing significant
flexibility by authorizing the issue of a number of award types,
which may include incentive stock options, nonqualified stock options,
SARs, restricted stock, performance shares, performance units, stock
grants, and cash. |
|
| out-of-the-money |
| A situation in which an underlying stock is trading
below an option's strike (exercise) price. |
|
| performance shares |
| Stock grants contingent upon the achievement of
specified performance goals. The number of shares payable typically
varies with performance as measured over a specified period. Few
companies clearly identify the criteria used to select performance
measures or the specific level of growth, or profit return, that
must be realized. Performance periods typically extend for a three-
to five-year period. |
|
| performance units |
| Cash awards contingent upon the achievement of specified
performance goals. The amount of cash payable typically varies with
performance as measured over a specified period. Few companies clearly
identify the criteria used to select performance measures or the
specific level of growth, or profit return, that must be realized.
Performance periods typically extend for a three- to five-year period. |
|
| perquisites |
| Benefits given to selected employees that include:
chauffeured limousines, personal use of corporate aircraft, security
systems, executive dining rooms, legal/tax/financial counseling
and services, and zero- or low-interest rate loans. Perks are not
based on any performance standards and are rarely taken away once
bestowed. |
|
| phantom stock or formula value stock |
| Shares analogous to company stock frequently used
by a private company or a division of a publicly traded company.
The value of phantom shares is determined by a formula rather than
the market price. Payment of phantom awards may be made in cash
or stock. |
|
| poison pill |
| The popular term for a takeover defense that permits
all shareholders other than an acquirer to purchase shares in a
company at a discount if the company becomes a takeover target.
A company with a pill (also known as a shareholder rights plan)
usually distributes warrants or purchase rights that become exercisable
when a triggering event occurs. The triggering event occurs when
an acquirer buys more than a specified amount of a target company's
stock without permission of the target company's board. Once the
pill is triggered, shareholders (except for the acquirer) usually
have the right to purchase shares directly from the target company
at a 50-percent discount, diluting both ownership interest and voting
rights. Most pills have provisions that permit the board to cancel
the pill by redeeming the outstanding warrants or rights at nominal
cost. Pills can force acquirers to bargain directly with a target
company's board, but they can also be used to deter or to block
acquisition bids altogether. Companies are not required by law to
submit their poison pills for shareholder approval, and very few
companies have chosen to seek shareholder approval. |
|
| preemptive rights |
| Preemptive rights are intended to allow existing
shareholders to maintain their proportionate level of ownership
by giving them the opportunity to purchase additional shares pro
rata before they are offered to the public. Preemptive rights are
something of an anachronism today, because shareholders of publicly
traded companies who want to maintain their proportionate ownership
interest may do so by purchasing shares in the open market. Many
companies whose charters have preemptive rights provisions have
asked shareholders to amend their charters to abolish preemptive
rights. |
|
| premium priced options |
| An option whose exercise price is above the market
price at the time of grant. |
|
| proxy |
| The granting of authority by shareholders to others,
most often corporate management, to vote their shares at an annual
or special shareholders' meeting. |
|
| proxy card |
| A card used by shareholders to grant voting authority
and provide voting instructions to their designated proxy concerning
issues submitted for shareholder vote at an annual or special meeting
of shareholders. The proxy card is attached to the proxy statement
and lists the proposals to be voted on at the meeting. Shareholders
check their vote in the boxes provided and sign the card. |
|
| proxy contest |
| Proxy contests take different forms. The most common
type of proxy contest is an effort by dissident shareholders to
elect their own directors. A contest may involve the entire board,
in which case the goal is to oust incumbent management and take
control of the company. Or, it may involve a minority of board seats,
in which case dissidents seek a foothold position to change corporate
strategy without necessarily changing control. Proxy contests may
also be fought over corporate policy questions; dissidents may,
for example, wage a proxy contest in support of a proposal to restructure
or sell a company. Many proxy contests are today waged in conjunction
with tender offers as a means of putting pressure on a target company's
board to accept the tender offer. In a well-financed proxy contest,
dissidents usually print and distribute their own proxy materials,
including their own proxy card. Proxy contests usually feature letter
writing and advertising campaigns to win shareholder support. |
|
| proxy statement |
| A document in which parties soliciting shareholder
proxies provide shareholders with information on the issues to be
voted on at an annual or special shareholders' meeting. The soliciting
party generally presents arguments as to why shareholders should
grant them their proxy. The information that must be disclosed to
shareholders is set forth in Schedule 14A of the Securities Exchange
Act of 1934 for a proxy solicited by the company, and in Schedule
14B of the act for proxies solicited by others. |
|
| put option |
| The right to sell the corresponding stock or futures
contract at a fixed price until the expiration date. |
|
| pyramiding |
| A cashless exercise method whereby a portion of
the shares under option is used as payment for the exercise price
of other options. |
|
| recapitalization plan |
| A recapitalization plan is any plan in which a company
changes its capital structure. Recapitalization can result in larger
or smaller numbers of shares outstanding, or in creation of new
classes of stock in addition to common stock. Recapitalization plans
must be approved by shareholders. |
|
| reincorporation |
| Reincorporation refers to changing the state of
incorporation. A company that reincorporates must obtain shareholder
approval for the move and for the new charter it adopts when it
shifts its state of incorporation. Many reincorporations involve
moves to Delaware to take advantage of Delaware's flexible corporate
laws. |
|
| reload options, restoration options, incremental
stock ownership, or accelerated-ownership options |
| A compensation scheme in which a new option is granted
for each exercise of a plan participant's stock options. These types
of awards assure that early exercise of options does not result
in the termination of the total amount of options granted, since
each exercised option is replaced with a new option. Under this
form of compensation, the risk that a plan participant will not
have captured the highest stock price is eliminated because every
time an option is exercised, another option replaces the exercised
option, thus enabling the plan participant to continue to realize
all the upside potential inherent in the original option grant. |
|
| repricing |
| An amendment to a previously granted stock option
contract that reduces the option exercise price. Options can also
be repriced through cancellations and regrants. The typical new
grant would have a ten-year term, new vesting restrictions, and
a lower exercise price reflecting the current lower market price. |
|
| restricted stock |
| A grant of stock subject to restrictions for which
there is little or no cost to the recipient. Such shares are usually
subject to forfeiture if the recipient leaves the company before
a specified period of time; thus, the awards are often used to retain
employees. The restrictions usually lapse over a period of three
to five years, during which time the recipient cannot sell his or
her shares. The recipient typically is entitled to vote the stock
and receive dividends on the shares. |
|
| restructuring plan |
| A restructuring plan is any plan that involves a
significant change in a company's capital structure. This would
include a recapitalization plan, a leveraged buyout, or a major
sale of assets. Restructuring plans often require shareholder approval
before they can be implemented. |
|
| rights of appraisal |
| Rights of appraisal provide shareholders who do
not approve of the terms of certain corporate transactions the right
to demand a judicial review in order to determine the fair value
for their shares. The right of appraisal generally applies to mergers,
sales of essentially all assets of the company, and charter amendments
that may have a materially adverse effect on the rights of dissenting
shareholders. |
|
| section 162(m) |
| The IRS Code Section that limits the deductibility
of compensation in excess of $1 million to a named executive officer
unless certain prescribed actions are taken. |
|
| shareholder value transfer (SVT) |
| A dollar-based cost which measures the amount of
shareholders' equity flowing out of the company to executives as
options are exercised. The strike price of an option is paid at
the time of exercise and flows back to the company. The profit spread,
or the difference between the exercise price and the market price,
represents a transfer of shareholders' equity to the executive.
The time value of money is also a significant cost impacting shareholders'
equity. |
|
| shareholder value/shareholder wealth |
| Shareholder wealth is determined by the present
value of cash flows distributed to the shareholders. Shareholder
value analysis, which focuses on the anticipated cash flow and the
riskiness of a business, is a more reliable way to evaluate a company
than accrual-based accounting measures. Traditional earnings-based
accounting measures, while useful, fail to measure changes in the
economic value of a firm for several reasons: (1) different accounting
methods may be employed; (2) risk is excluded; (3) investment requirements
are excluded; (4) dividend policy is not considered; and (5) the
time value of money is ignored. In contrast, a shareholder value
analysis approach provides a consistency of analysis across functions,
levels, and types of business decisions, and that it is linked to
familiar parameters such as sales growth rate, operating profit
margin, and working capital investment. |
|
| shark repellent |
| The term "shark repellent" can refer to any kind
of antitakeover measure. It is a generic term rather than a definition
of a specific takeover defense. |
|
| stakeholder laws |
| In essence, stakeholder laws state that corporate
directors owe a duty to a host of constituencies beyond shareholders:
local communities, employees, suppliers, creditors, and others.
This is in contrast to the traditional model of the publicly held
company in law and economics, which says that corporate directors
have a legally enforceable duty to one constituency their share
owners. |
|
| stock appreciation rights (SARs) |
| Allow a recipient to collect, in cash, the difference
between the exercise price and the market price of an option without
having to make a personal cash outlay to exercise the option. SARs
permit recipients to collect the profit on option grants while sidestepping
the SEC insider trading provisions, which require the option holder
to retain the stock purchased upon exercise of an option for a period
of at least six months. This rule, Section 16(b) of the Securities
Exchange Act of 1934, is designed to prohibit insiders from profiting
by buying and selling blocks of company stock within short periods
of time. SARs put company officers on the same plane as nonofficers,
who are free to buy and sell stock at will. These types of awards
are usually granted in tandem with incentive stock options or nonqualified
stock options. Tandem SARs allow the award holder to receive the
profit from a stock option in lieu of exercising the option which
is surrendered when payment is made. |
|
| stock options |
| Give holders the right to purchase stock at a fixed
price for a specified period of time. The difference between the
exercise price and the market price is called the "spread" and constitutes
the reward to the option holder. The value of an option grant is
heavily dependent on the volatility of a particular company's stock.
The more volatile the company's stock, the more valuable the option
grant. Thus, options are usually most valuable at high-growth, low-dividend
companies. |
|
| stock purchase right |
| The right to purchase shares of stock at a discount
for a set period of time. |
|
| street name/nominee name |
| Holding a customer's stock "in street name" is when
broker-dealers, banks, or voting trustees register the shares held
for customer accounts in their own names. Such a system makes it
more difficult to obtain shareholder information. Often the legal
owners are not the beneficial owners of the stock and therefore
may not have the power to vote or direct the voting of the stock.
The beneficial owners direct the brokers and banks as to whether
their identity may be disclosed. |
|
| supermajority |
| Most state company laws require that mergers, acquisitions,
and amendments to the corporate charter be approved by a majority
of the outstanding shares. A company may, however, set a higher
requirement by obtaining shareholder approval for a higher threshold.
Some supermajority requirements apply to mergers and acquisitions.
Others apply to amendments to the charter itself that is, the charter,
or certain parts of it, may be amended in the future only if the
amendments receive the specified supermajority level of support. |
|
| time-accelerated restricted stock award plan (TARSAP) |
| A restricted stock plan that has built-in performance
criteria. The TARSAP normally provides the opportunity to fix flexible
terms, thus limiting the economic exposure of an employee. |
|
| tin parachutes |
| Compensation agreements that cover middle management
and other non-highly compensated employees in the event of a change
in control. Like golden parachutes, these severance payment packages
can be adopted by a board without shareholder approval, provided
that the parachute is not adopted primarily as a defensive measure
in response to a hostile bid. |
|
| underwater options |
| Options for which the exercise price exceeds the
current market price. |
|
| unequal voting |
| Companies with dual-class capitalization plans usually
have two classes of stock with different voting and dividend rights.
Typically, one class of stock has higher voting rights and lower
dividend rights. Insiders owning the higher voting shares are able
to maintain control, even though they usually own only a fraction
of the outstanding shares. |
|
| vesting schedule |
| A holding period following grant date during which
time options may not be exercised. |
|
| volatility |
| The potential dispersion of a company's stock price
over the life of the option program. Volatility is a critical input
into option pricing models. |
|
| voting power dilution (VPD) |
| The relative reduction in voting power as stock-based
incentives are exercised and existing shareholders' proportional
ownership in the company is diluted. |
|
| written consent |
| The ability to act by written consent allows shareholders
to take action collectively without a shareholders' meeting. The
written consent procedure was developed originally to permit closely
held companies to act quickly by obtaining consents from their shareholders.
The procedure, however is, available in many states to publicly
traded companies as well, unless prohibited or restricted in a company's
charter. Many companies have sought shareholder approval to restrict
or abolish the written consent procedure; their principal reason
for doing so is to prevent takeovers opposed by the incumbent board
and management. |
|
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