How special dividends hurt holders of ESOs, and Restricted stock

Here is an article illustrating how some companies are granting special dividends to shareholders and paying the dividend before year's end to avoid the extra tax on dividends that is expected starting 2013.

http://moneymorning.com/2012/11/19/these-special-dividends-in-2012-help-investors-beat-the-fiscal-cliff/

If you are holding unvested ESOs or vested ESOs that are not far in the money with little or no "time value" remaining, these specials dividends will cause the stock to drop after the ex-dividend day an amount equal to the special dividend. Your ESOs will decrease in value accordingly. In some cases when the stock is not far above the exercise price, the payment of the special dividend can be devastating to the holders. The devastation in some cases will be so great that it is reasonable to consider the special dividend as a violation of the options contract.

Restricted stock holders generally do not receive the dividend and if they do not, the value of the restricted stock is again diminished.

There is a way to correct the devastation and that would be to adjust the exercise price for the options especially those where the stock is near or slightly above the exercise price. The holders of restricted stock can be corrected by granting them the special dividend when the Restricted stock vests.

But the whole matter of the special dividend paid before the end of the year will create a can of worms where there are substantial amounts of equity compensation holding in a particular company.