Options Exchanges Help to Generate Legal Work

Some big-firm lawyers are busier than others nowadays, but it's not
just the bankruptcy guys getting work. Options exchanges have been a
boon to benefits and executive compensation lawyers, filling a void in
their workload left by the lull in M&A activity.

Baker & McKenzie's
Valerie Diamond said options exchanges -- in which companies turn
underwater options into better-priced options, restricted stock or cash
for the benefit of shareholders or employees -- are taking up 70
percent of her time. A couple of years ago, they rarely popped up at
all.

Her 20-attorney group has done about 50 options exchanges in the past year, for clients including eBay Inc. and Polycom Inc.

The boom is a result of two things: plummeting stock prices and a
2005 accounting rule change that made the exchanges more immediately
available.

"There's really been an explosion of these things in the past year,"
Diamond said. "I didn't expect there were going to be so many companies
doing it. From the employees' standpoint, if they can't exercise [an
option] and realize that cash, they feel that they have nothing of
value. It's essentially trying to make sure employees stick around and
feel compensated."

Diamond, chairwoman of Baker & McKenzie's equity services group,
specializes in the international side of the exchanges. For each
country where employees are located, they must receive a disclosure on
the tax consequences of the exchange, which translates to a lot of work
for lawyers. Most of the companies Diamond has advised have offices in
at least 30 countries, and she says she just finished an exchange for a
company with offices in 65 countries.

Legal fees can add up fast. An exchange can easily cost a company upward of $100,000, she said.

Joseph Yaffe, an executive compensation lawyer who moved from Latham & Watkins to Skadden, Arps, Slate, Meagher & Flom on Wednesday, said that about a third of his time is now taken by options exchange work.

"These option exchanges have come close to filling up the void left
by the downturn in transactional work," Yaffe said. "There have been
fewer deals, but there have been more option exchanges. My group would
generally be supporting M&A transactions and has been doing a lot
more of this work at the same time the M&A market has been slower."

Yaffe's six-person team had done about 20 exchanges, some of them
for private companies. His clients have included eBay, Advanced Micro
Devices Inc. and NetApp. (Diamond did the international aspect of the
eBay exchange.)

The last boom in options exchanges was during 2001 and 2002, and
most of those involved technology companies. After the 2005 accounting
change, there's been a steady uptick in exchanges, starting with 12 in
2005, according to consulting firm Radford, which tracks the exchanges at Underwaterexchange.com.

In 2008, about 50 companies exchanged underwater options. That
number is on track to triple this year. About 70 companies have already
completed tender offers with the SEC, and another 70 or 80 have
signaled an intention to do an exchange through their proxy statements,
according to Jon Burg, vice president at Radford.

Of the 120 completed exchanges from 2008 and 2009, half were
technology companies, 10 percent were biotech or life sciences
companies and the other 40 percent were general industry, according to
Burg. That's a change from

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