Options Expired December 30, 2011, But Expiration Date January 2, 2012: What To Do Next?
We have an Ask the Experts features on the public site version of www.myStockOptions.com. While we do post some of the questions/answers, most of the questions we address privately and do not post back on our public site or on the Knowledge Center that companies and stock plan providers license. Occasionally we get a question that is really interesting (not just a basic situation or someone ranting) and raises questions to me about administrative and communications practices.
Below is a shortened version of the question we recently received, which may or may not reflect what actually happened but this is what I was told in an email sent to our site:
I was granted stock options in 2002 from my company as a bonus. The expiration date of these shares was January 2, 2012 (Bruce note: they are significantly in the money). On January 2, 2012, I logged on to my online account, and my shares were gone.
Obviously, I was quite upset, but was unable to speak with anyone at that time as I was told it was a holiday. I work in retail, and it was not considered a holiday and it did not occur to me that I would not be able to exercise my options on that day (apparently they actually expired on December 30, 2011!) I was actually reminded from the brokerage company handling the options that my shares expired January 2, 2012.
This stock plan participant from an unnamed company is looking for any steps to take next. My usual answer about expiring options and personal responsibility does not neatly fit this situation as it has some twists to it. I am curious about whether companies can just shorten the expiration date like that on stock options and whether the brokerage firm communications (and agent of the company, I assume) overrides whatever's in the company's plan.
I assume the plan documents must need to make some reference to how holidays are handled for expiration and vesting dates. Given that most employees handle option exercises online, why should the expiration date being on a holiday (and January 2nd is only the holiday---and not for all companies---because January 1st was on weekend) matter anymore?
Bruce Brumberg, Editor
www.myStockOptions.com and www.myNQDC.com
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Dear Bruce:
Assume an employee owns ESOs that are vested and have 6 years to expiration and are trading 70 per cent above the exercise price. The value of the ESOs make up 50 % of his/her net worth.
A wealth manager to that employee has two choices to recommend risk reduction as fiduciaries are required to advise risk reduction in these circumstances. Otherwise the wealth manager can be sued for violating his fiduciary responsibilities. He can recommend premature exercise, sell and diversify or he could recommend selling exchange traded calls to reduce the risk.
Premature exercise, sell stock and diversify forfeits "time value" and requires an immediate tax and the amount of risk reduction by diversity is questionable. It also eliminate the employee/employer alignment 100%.
On the other hand selling calls preserves the "time value", delays the possible taxes and preserves part of the employee/employer alignment. and reduces risk.
My question is: Why do none of your experts recommend the selling calls which is clearly much more rewarding for the employee under the circumstances than premature exercise, sell and diversify. Selling calls are permitted by most companies, not prohibited by the SEC. The tax rules are friendly and ISS looks favorably on it.
Even if the stock was higher and the time remaining was less, selling calls is by far the best way.
John Olagues
Hi Bruce,
I have seen this scenario several times in my career. It is most likely that the plan is silent regarding an award expiring on a weekend or holiday. There is a slight possibility that the la mentions that if the expiration date is on a non-market day, the grant will then expire on the "next preceding" market day (for you non-lawyers this means the day before).
In the likely event that plan is silent many (i would say most) will allow the transaction to take place as a "cash" or other non-market exercise as of the final expiration date communicated. In this case Jan 2, 2012. They would likely use then FMV from the most recent market day prior to that date.
Some companies clearly communicate the administrative process for transactions like this. They make it clear that if you expiration date falls on a non-market day then the last day to perform the transaction is the final market day prior to the real expiration date (this seems to have stood up in court). Some even go as far as to make it clear the exact time of day where the cut-off takes place. I know that years ago Citigroup had a process where you needed to contact them by 5pm ET on the day of transaction. You also had to transact your award the final market day prior to expiration. In this event they could (and usually would) turn down the transaction if you contacted them at 3:30pm, Dec. 30, even thought this is technically DAYS before your expiration.
I hope this answer helps,
I would love to hear from other ECE members how their companies would (or has) handled situations like this.
Dan