4000 - Advisory Opinions
Stock Option Plan for Disinterested Non-Employee Directors
February 1, 1989
Gerald J. Gervino, Senior Attorney
In your recent letter addressed to Mr. Lawrence Pierce of this Corporation, you inquire concerning the adoption of a stock option plan by your client, the ***. You specifically ask our concurrence with your view that the plan is in compliance with section 335.411(c) of our rules and regulations, and that an initial one-time grant to the bank's non-employee directors of a fixed number of options will not disqualify those directors from being "disinterested persons" within the meaning of § 335.411(c)(4)(iii) of our regulations.
The plan was adopted by the bank's board of directors on August 17, 1988, subject to the approval of the bank's stockholders at an annual meeting to be held within one year of the date of the board of directors' approval. The plan is also subject to the approval of the banking commissioner of the state and to a determination by the bank, following consultation with the FDIC, that the plan is in compliance with FDIC regulations. If either the shareholders or the state banking commission fail to approve the plan or we indicate that the plan is not in compliance with our regulations, any options heretofore granted under the plan will be null and void and of no effect.
The plan will be administered by a committee, none of whom will be a salaried employee of the bank and each of whom must qualify in all respects as a "disinterested person" as that term is defined in section 335.411(c)(4)(iii) of our regulations. No person shall be eligible to serve as a member of the committee if he or she has been eligible, at any time during the preceding twelve-month period, for selection as a person to whom shares of any class of stock of the bank may be allocated or to whom stock options or stock appreciation rights may be granted under the plan.
Thus, a person on the committee shall be considered ineligible for selection as a person to whom shares of any class of stock of the bank may be allocated or to whom stock options or to whom stock appreciation rights may be granted pursuant to the plan or any other plan of the bank or of its affiliates upon the passage by the bank's board of directors of a resolution to that effect. However, the initial grants of options will not be considered in determining whether a person will be eligible to serve as a member of the committee.
Under the plan, each non-employee director of the bank has been granted an initial, non-qualified stock option for ten thousand shares of common stock, subject to the requisite approvals. Two non-employee directors have each been awarded an additional non-qualified stock option to purchase 200,000 and 800,000 shares of common stock respectively. The purchase price is the fair market price on the date the option is granted.
The committee may also make subsequent grants to employees and non-employee directors. However, once a non-employee director receives a stock option grant, he or she may not serve on the committee for at least twelve months. Further, if a non-employee director resigns from the committee, he or she will not be eligible for selection by the committee for the following twelve-month period. Thus, the combined effect of the two periods of ineligibility means that a period of twenty four months must pass before a non-employee director will receive an option to invest in an option of a committee member replaced by such director.
In your view, the plan complies fully with section 335.411(c) of our regulations and the initial, one-time grant of a fixed number of stock options to the bank's non-employee directors will not disqualify those directors from being considered "disinterested persons" within the meaning of § 335.411(c)(4)(iii) of our regulations for purposes of administering the plan or any other stock plan that your client may adopt in the future.
Based upon the facts presented, we feel that your plan may comply with the provisions of sections 335.411(c) and that the one-time grant of a fixed number of options to the bank's non-employee directors will not in itself disqualify them from serving as "disinterested" administrators of the plan.
Because this position is based on representations made to us in your letter, we note that any different facts or conditions might require a different conclusion.