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As many of you who have been involved in a stock option repricing know, compliance with the “all holders” and “best price” provisions of Rule 13e-4 can be tricky. Fortunately, the SEC issued an exemptive order in March 2001 to provide relief from Rules 13e-4(f)(8)(i) and (ii) of the Exchange Act (the “Global Exemptive Order“) allowing companies to treat option holders differently depending on their individual circumstances.

Although stock option repricings have declined in popularity due to certain accounting rule changes, transactions involving stock options that implicate the tender offer rules are fairly common. In some cases, companies and their counsel have relied upon the Global Exemptive Order and sought their own no-action relief in conducting non-repricing tender offers that discriminate among different groups of option holders.

For example, Martha Stewart Omnimedia offered a deferred cash bonus only for options with strike prices in excess of a certain amount. See SEC No-Action Letter to Martha Stewart Living Omnimedia, Inc. (available November 7, 2003). In a similar transaction, Comcast offered to pay cash only for options held by former Comcast employees. See SEC No-Action Letter to Comcast Corporation (available October 7, 2004). While the Staff has explicitly stated that they will not recommend enforcement action in these instances, practitioners may not realize that outside the context of a straight repricing, satisfaction of the conditions set forth in the Global Exemptive Order in and of itself does not guarantee availability of the exemption from the “all-holders” and “best price” provisions of Rule 13e-4.

Recently, the Staff has reminded practitioners that when limiting offers to only certain option holders or options such differential treatment must be based on objective criteria. Unfortunately, the Global Exemptive Order does not explain the need for creating separate classes of options and why it is critical to compliance with the all-holders rule even where relief is granted.

The answer is that companies can typically avoid implicating the all holders and best price provisions by essentially “creating” different classes of securities. This point, however, may be lost on practitioners working on transactions where only select options or option holders are allowed to participate.

As a basis for its informal position the Staff has analogized to earlier interpretations that stock options are treated as separate classes of securities in both the Section 16 reporting and Section 12 registration contexts. In those instances, the Staff has looked to certain objective criteria, such as grant date, strike price, term and the specific plan(s) under which options are issued, to conclude that options can be divided into separate classes of securities. The staff points to prior no-action letters, such as Kathleen A. Weigand (available March 29, 1991) (Section 16 reporting), General Roofing Services, Inc. (available April 13, 2000) (Section 12 registration) and Kinkos, Inc. (available November 30, 1999) (Section 12 registration), as support for its view that options and option holders can be treated differently if objective criteria are used to essentially create separate classes of options.

Something to consider the next time you are involved in a transaction outside the repricing context and all options or option holders will not be treated alike. Thanks to John Kao of Gibson Dunn for shedding light on this unclear area of the lore!