Option grants in stock of parent corporation whose stock is traded on

[Guest tom h]

A wholly owned U.S. subsidiary of a foreign corporation is considering implementing a broad-based stock option program using the stock of its parent which is traded only on a foreign stock exhange. Can this be done? What unique legal and/or practical problems are presented by virtue of the stock only being traded on a foreign exchange?

[Kirk Maldonado]

Probably your biggest hurdles will be federal and state securities laws issues. You better hire competent securities counsel.

[pjkoehler]

I'm guessing that the securities of the foreign parent are not registered under the Securities Act of 1933. A foreign issuer may rely on one of several exemptions: (1) private placement, (2) a Regulation D offering or (3) a Rule 701 offering. If the stock option plan will be broad-based, then Rule 701 provides the most flexibility. Rule 701 does not restrict the number of offerees or their level of sophistication. It's principal limitation is that it only applies to arrangements that are part of a compensatory plan, that is not part of a capital-raising device. Under the rule, the maximum value of securities that may be sold in a 12-month period is the greatest of: (1) $1 million; (2) 15% of the foreign issuer's total assets, or (3) 15% of the value of the outstanding securities of the class subject to the option plan. No disclosure other than a delivery of a copy of the relevant benefit plan is required by Rule 701 so long as sales do not exceed $5 million in a 12-month period. If an issuer sells securities with an aggregate offering price of more than $5 million, the issuer must provide disclosure to each individual optionee holding an exercisable option, not just those who acquire shares after the $5 million threshhold is exceeded. These disclosures include financial statements including in the case of foreign issuers, a U.S. GAAP reconciliation and unaudited financial statements for the prior 2 fiscal years. Foreign issuers may wish to structure their option grants to U.S. employees to avoid exceeding the $5 million limit, so that they do not have the burden of preparing financial information not otherwise required by their home country.

[Kirk Maldonado]

A bit of clarification. PJK's discussion only relates to federal securities laws. You also need to check the securities laws of each state in which the securities are to be sold. For example, some states regulate the issuance of options, while others regulate only the issuance of stock upon the exercise of the option.