decoration decoration
Stories

GROKLAW
When you want to know more...
decoration
For layout only
Home
Archives
Site Map
Search
About Groklaw
Awards
Legal Research
Timelines
ApplevSamsung
ApplevSamsung p.2
ArchiveExplorer
Autozone
Bilski
Cases
Cast: Lawyers
Comes v. MS
Contracts/Documents
Courts
DRM
Gordon v MS
GPL
Grokdoc
HTML How To
IPI v RH
IV v. Google
Legal Docs
Lodsys
MS Litigations
MSvB&N
News Picks
Novell v. MS
Novell-MS Deal
ODF/OOXML
OOXML Appeals
OraclevGoogle
Patents
ProjectMonterey
Psystar
Quote Database
Red Hat v SCO
Salus Book
SCEA v Hotz
SCO Appeals
SCO Bankruptcy
SCO Financials
SCO Overview
SCO v IBM
SCO v Novell
SCO:Soup2Nuts
SCOsource
Sean Daly
Software Patents
Switch to Linux
Transcripts
Unix Books
Your contributions keep Groklaw going.
To donate to Groklaw 2.0:

Groklaw Gear

Click here to send an email to the editor of this weblog.


To read comments to this article, go here
Cahn Files Motion to Approve Stock Options - Updated 2Xs
Saturday, January 09 2010 @ 03:10 AM EST

Now SCO's Chapter 11 Trustee wants the court to authorize the issuance of stock options the board of directors awarded themselves in December "because they were concerned that as a result of the appointment of the Trustee, their options would expire within 120 days after the Trustee Appointment Date," so the money paid can be added to the estate's pot. It's a little more complicated a story than that. The Trustee seems to think it's a de minimis matter, as the options don't really harm anybody but the regular stockholders, and not by much, in his view. And there are restrictions on the options, the Motion points out, namely that they can't be sold until they vest, as I understand the Plan.

But has anyone shown the Trustee the 2004 Change in Control Agreement that allows for immediate vesting on a change of control? Well, I'll show it to you.

And no, Darl's not on the list. But Yarro is, along with Duff Thompson, Darcy Mott, Kent Millington, Omar Leeman, and Daniel Campbell. Supposedly this grant of options was voted on by the board in August of 2009, to cover the board for 2nd and 3rd quarters, which they say they somehow forgot about, and then they issued the options in December. But some things keep circling in my brain, and I can't see this as anything quite as insignificant as the Trustee seems to. I'll show you why.

Here are the filings, first:

01/08/2010 - 1033 - Motion to Approve // Motion Of The Chapter 11 Trustee For Entry Of An Order (1) Confirming That Certain Stock Options Granted Post-Petition Were Awarded In The Ordinary Course Of The Debtors Business (2) Authorizing The Trustee To Honor Certain Stock Options Exercised In Accordance With The Debtors Books And Records (3) Confirming Notice As Given Is Sufficient And (4) Granting Related Relief Filed by Edward N. Cahn, Chapter 11 Trustee for The SCO Group, Inc., et al.. Hearing scheduled for 1/27/2010 at 03:00 PM at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware. Objections due by 1/20/2010. (Attachments: # 1 Notice # 2 Exhibit A # 3 Exhibit B # 4 Proposed Form of Order # 5 Certificate of Service) (Fatell, Bonnie) (Entered: 01/08/2010)

At what point does this all become simply ridiculous? SCO just told the court at the last hearing that it is on a shoe string, that it can't even afford to pursue the Swiss arbitration. Does SCO really need, at this point, to have stock option plans "designed to promote the interests of SCO and its stockholders by incentivizing and rewarding employees who make long-term contribution to the success of the company"? What success? Long term? Are they kidding? When do we see a motion to pay Novell or any of the creditors, by the way?

The motion phrases it delicately as to what happened, on page 4:

12. The Trustee is advised that prior to the chapter 11 filing, the board of directors each received between $8,750 and $11,250 per quarter as compensation for serving on the board. By resolution dated September 13, 2007, the board of directors approved the award of 10,000 Options to each director on a quarterly basis as compensation for serving on the board, in lieu of cash. The quarterly grants were awarded pursuant to the 2004 Plan. The grants were awarded after the close of each quarter, up and until the second quarter of 2009. Due to an apparent oversight, the Debtors failed to timely grant Options to the board members for the second and third quarters of 2009, and therefore, by board resolution dated August 3, 2009, the board of directors were awarded the pre-approved Options as compensation for the second and third quarters of 2009.

13. Additionally, pursuant to the 2004 Plan, the directors were also annually awarded 15,000 Options for each year they served on the board. The directors were awarded post-petition Options on the dates and in the amounts and at the exercise price as set forth on Exhibit B hereto. In total, the directors were awarded 660,000 Options post-petition. As of the date of this Motion, there are approximately 21,586,000 shares outstanding, thus the directors' options account for approximately 3% of the total outstanding shares.

14. The Debtors treated the post-petition award of Options to the directors as transactions in the ordinary course of business.

15. During the month of December, the directors exercised the Options granted to them, because they were concerned that as a result of the appointment of the Trustee, their options would expire within 120 days after the Trustee Appointment Date, pursuant to section 7(e) of the 2004 Plan which provides that non-qualified stock options must be exercised with 120 days of an employee's termination. 5 See 2004 Plan Section 7(e). While the exercise appears to be in the ordinary course of business, out of an abundance of caution, the Trustee is holding in escrow all funds paid by the directors to exercise the Options until the Trustee receives authorization from the Court to honor these Option exercises.

I wouldn't call that an overabundance of caution, personally. I'd like to look at it all a little *more* carefully, actually. What kind of options are these? Exhibit B shows vesting dates far, far in the future, 2018 and 2019 (or expiration dates, see update), but I don't see any information on what kind of grants these are. The Plan allows for quite a variety, as I'll show you, and that could matter.

And something strikes me as strange. Darl didn't get terminated until October of 2009, and if you recall SCO's year goes from October to October, so why *isn't* he on the list? He was still on the board, was he not, until his termination date? [Note: see update below.] So if this is for that time period, logically they would have included him, I would think, when they voted in August. And how come we don't get to see the August document showing the board vote? I'd like to see that this story has some support. The only explanation I can see is that his options were forfeited when he left, so they have since just erased him from the list. The Stock Plan says that's what happens if your options haven't vested and you leave, if I recall, unless they make a special arrangement. But my point is, if the vote was in August, should that not be memorialized somewhere? Even if he forfeited, wouldn't that be recorded, so folks like me who rivet on to details don't go nuts trying to figure out mysteries? We never seem to get the complete picture, do we?

And if you were Darl, wouldn't you care? I mean, if the Chapter 11 Trustee coming on board represented a change in control, as is now being suggested as possible in the Motion, and if the Change in Control Agreement is still in place, wouldn't he get some options that immediately vested? He wasn't terminated immediately when the Trustee took over, after all, and so if the Change of Control Agreement is still in effect, I think his options should have immediately vested. How they work out the details, since they forgot to issue them until after he left... well, that's what lawyers are for. It all seems a little vague, though, don't you think?

I'm not implying that they don't know the answers or that anything is out of place. I'm saying that we, the public, have a sticky wicket trying to figure out what in the world is going on. It sounds, frankly, a little bit weird. They forgot to issue options to themselves after doing so in the ordinary course for years and years? These guys?

By the way, when a lawyer writes something like "The Trustee is advised..." it means he or she doesn't know if it's true or not. It's something he's been told, but he's not owning the truth of it, personally, because he can't. That doesn't mean it isn't true, just that the lawyer doesn't really know for sure. He or she is reporting what's he or she has been told. Here's the footnote:

5 While the Trustee does not take a position on this issue, it is conceivable that the directors' options did not expire within 120 days after the Trustee was appointed and continue to remain exercisable. Pursuant to, section 7(f) of the 2004 Plan, "[u]pon a change in control... Options granted...shall remain exercisable until their expiration notwithstanding the provisions of Section 7(e) the [2004] Plan." It is possible that the appointment of the Trustee triggered such a "change in control", thereby continuing the exercise right until the expiration of the options. See Oil and Grease on Wheels, Inc. v. Medicare Supply Co. of New England, 2000 R.I. Super. LEXIS 32 (R.I. Super. April 26, 2000) (holding that, in an analogous situation, appointment of a receiver by a state court to handle a company's liquidation constituted a "change in control").
Woah. Analogous? Are they are liquidating SCO? Or maybe it isn't perfectly analogous? It certainly matters if it is or isn't a change of control, but this says it's possible that the Trustee taking over was a change of control. So let's see what happens if there is a change of control, under that Change of Control Agreement, if it's still operative:
WHEREAS, both the Compensation Committee of the board of directors of the Company and the entire board of directors of the Company (collectively, the “Board”) has determined that it is in the best interests of the Company and its stockholders for the Company to agree to provide for accelerated vesting of stock options and restricted stock under the circumstances described below to the Executive and other executives who are responsible for the policy-making functions of the Company;...

2. Change in Control. If the Executive is still employed by the Company when a Change in Control occurs, the Executive shall be entitled to the following benefits:

2.1 any stock, stock option or restricted stock granted to the Executive by the Company that would have become vested upon continued employment by the Executive shall immediately vest in full and become exercisable notwithstanding any provision to the contrary of such grant and shall remain exercisable until it expires or terminates in accordance with its terms.

So, if Darl was still employed after the Trustee took over, and he was, and if that was a change of control, wouldn't his options have immediately vested? See what I mean? And so would all of the board members' options. [Note update, below, on Darl.]

The question is, is that Change of Control Agreement still in effect? It was to terminate in three years, as of December of 2007, but there was an automatic renewal year by year unless someone stopped it, in writing:

6. Termination. This Agreement shall terminate on the third anniversary of the date hereof, provided, however, that commencing on the third anniversary of the date hereof and on each annual anniversary thereafter (the “Renewal Date”), unless previously terminated, the term of this Agreement shall be automatically extended so as to terminate one year from such Renewal Date, unless at least sixty days prior to the Renewal Date the Company shall give notice to the Executive that the term of this Agreement shall not be so extended. This Agreement shall not apply to a Change in Control which takes place after the termination of this Agreement.
Has anyone stopped extending it? If not, why isn't it being presented to the court? It's not relevant?

Here's a couple of ways the agreement defines change of control:

c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, immediately following such Business Combination more than 50% of, respectively, the shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such entity resulting from such Business Combination) ultimately beneficially owns, directly or indirectly, 50% of more of, respectively, the then outstanding shares of common stock of the entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such entity except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the board of directors of the Company providing for such Business Combination; or

(d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

50% or more, eh? I think I'll put a post it right there. These change of control events are at least a possibility, even if a change of control hasn't already happened on the appointment of the Chapter 11 Trustee, I would think. I don't see bankruptcy addressed in the Agreement, so that's another topic for lawyers, not li'l ole me.

Here's what worries me. I gather Novell thinks that SCO wants to postpone the arbitration because in SCO's mind, it thinks maybe it can win copyright ownership in Utah and if the arbitration isn't also decided, it certainly would look to lay people like SCO 'won". Would the stock price go up? You think? If the options have already vested, then wouldn't that mean these happy few could make a fast killing in the stock market in the interim? If the arbitration is put off, it could be years before it comes to the front burner again. Appeals can take a long time too, especially since this one inevitably is going to at least try to get the Supreme Court's attention, no matter who wins below.

See why immediate vesting might matter? Might that explain the board's urgency to self-help to protect that interest? I certainly don't know. They don't tell us enough to know.

Not to be unkind or overly suspicious, but there is some history of difficulties with stock options at SCO, if you recall:

Based upon that evaluation, and subsequent evaluations, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report and as a result of the material weakness in our internal controls described below, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms.

We have a material weakness with respect to accounting for capital stock and stock option transactions.

And here's how they did the math in 2004:
The Company accounts for stock options issued to directors, officers and employees under Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees, and Related Interpretations.” Under APB No. 25, compensation expense is recognized if an option’s exercise price on the measurement date is below the fair market value of the Company’s common stock. The Compensation expense, if any, is amortized to expense over the vesting period.
I know you might say, yes, but this will bring in money to the company, no? In fact the Motion argues exactly that, and while it acknowledges it will dilute regular shareholders, they knew about the Stock Plan, and it's de minimis:
21. The Trustee submits that the horizontal and vertical dimensions are met with respect to the post-petition grants of Options to the Debtors' directors. The award of the Options is a common practice in the Debtors' industry. With respect to the so-called "vertical test", the evidence will show that SCO had the 2004 Plan, and others like it since at least fiscal year 1998, a fact that is well-known through the filings required of public companies. Therefore, hypothetical creditors would be well aware of the "risk" inherent in the Debtors' stock option plans. The Trustee further submits that the award of Options post-petition did not harm or have any negative impact on creditors since option simply allows the board members to purchase shares of SCO and does not deplete the estate's cash or diminish the value of its other assets in any fashion. Accordingly, the Trustee submits that the Options granted to the Debtors' board of directors post-petition were awarded in the ordinary course of business.

22. The Trustee further submits that honoring any properly exercised Options is an ordinary course of business transaction. It is implicit that, if the grant of stock options is a common industry practice, honoring the exercise of those options must also be a common industry practice. Further, the exercise of the Options will not harm or have any negative impact on creditors. Instead, exercise of the Options will provide value to the Debtors' estates because the Options will be exercised at fair market value and the Debtors will receive cash payments of the exercise of the Options.

23. The Trustee recognizes that the grant and exercise of Options may have a dilutive effect on the current SCO stockholders' value and voting rights, however the dilutive effect on the current stockholders is believed to be de minimis. Additionally, the stockholders approved the 2004 Plan which explicitly authorizes the issuance of Options without further notice to the stockholders. Therefore, the Trustee submits that the relief requested herein is appropriate because it is in the best interest of the creditors and the Debtors' estates and has only a de minimis impact on the current SCO stockholders. The Trustee further submits that, in light of the de minimis impact on the stockholders and the fact that the stockholders previously approved the 2004 Plan, further notice to the stockholders is not necessary.

24. The relief requested herein is not intended to be and shall not be construed as an assumption by the Trustee of any of the Debtors' pre-petition stock option plans or stock option agreements. Accordingly, the Trustee reserves the right to reject any such plans or agreements in the future.

If the options grants takes this circle over 50%, are you sure it's going to be de minimis in effect? All the plans we saw SCO come up with involved the same people traveling to the new entity, except for Darl at one point, didn't they? And where is the rule or bylaw or whatever that says if you forget to issue options, you can make up for it later? No. Seriously. Are these "properly exercised Options"? I like the sound of paragraph 24, I confess.

Let's imagine something. What if SCO's strategy plays out the way it wants it to. What if, as in their dreams, they rush through a thoroughly biased trial in Utah. Since we're imagining, let's even imagine the fix is in. Let's imagine the board believes the fix is in, that this is now a sure shot. Again, we're just imagining. But if they could simultaneously fend off the arbitration until years later, an arbitration that brings all their hopes to an end because of the GPL, at a minimum, couldn't they start suing people and resurrect SCOsource, and get investors interested, as if the arbitration doesn't matter? During that interim, they might think, they could rake in the dough.

If you own stock in SCO, does it matter to you? Footnote 6 says that "these securities are subject to restrictions on transfer which limits the ability of the holder to freely resell such securities". But if the Change of Control Agreement is still in effect, who cares? The options vest immediately, maybe already have, and then they just send them the new certificates without the restrictions language. [Note update below regarding SCO being behind on SEC filings.]

What if only the Stock Options Plan is still in effect? Here's how it works, as you can see in Exhibit A, kind of like a blank check, as I read it:

The 2004 Plan is administered by the Compensation Committee whose members serve at the discretion of the Board. The Compensation Committee is authorized, among other things, to do the following:
  • to construe, interpret and implement the provisions of the 2004 Plan;
  • to select the persons to whom incentive awards will be granted;
  • to determine when incentive awards will be granted;
  • to determine the terms and conditions of such incentive awards;
  • to establish the performance criteria under which incentive awards will be granted;
  • to determine when and under what circumstances an incentive award can be settled, canceled, forfeited, exchanged or surrendered;
  • to make rules with respect to the 2004 Plan;
  • to determine the terms and provisions of award agreements, which are required to accompany and evidence any incentive award under the 2004 Plan (the terms of which are accepted by any participant of the 2004 Plan through the act of accepting the incentive award); and
  • to make all other determinations deemed necessary or advisable for the administration of the 2004 Plan.
The 2004 Plan provides that no member of the Compensation Committee shall be liable for any action, omission or determination relating to the 2004 Plan and that the Company shall indemnify and hold harmless each member of the Compensation Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the 2004 Plan has been delegated against any cost, expense or liability arising out of any action, omission or determination relating to the 2004 Plan, if, in either case, such action, omission or determination was taken or made by such member, director or employee in good faith and in a manner such member, director or employee reasonably believed to be in or not opposed to the best interests of the Company.

ELIGIBILITY

The persons who are eligible to receive awards pursuant to the 2004 Plan include all employees and directors of the Company and its subsidiaries and such other persons, including outside consultants, whom the Compensation Committee determines are expected to make a contribution to the Company. Currently, there are eight directors, four executive officers and 298 employees of the Company who are eligible to receive awards pursuant to the 2004 Plan. The Compensation Committee may grant incentive awards to any, all or none of such eligible persons at any time, or from time to time, during the term of the 2004 Plan. Participants in the 2004 Plan are persons who both are eligible to receive an incentive award pursuant to the 2004 Plan and to whom an incentive award is granted pursuant to the 2004 Plan and, upon his or her death, his or her successors, heirs, executors and administrators, as the case may be.

AWARDS UNDER THE 2004 PLAN

The 2004 Plan permits the award of stock options, stock appreciation rights, restricted stock, restricted stock units, phantom stock rights and stock bonuses. Stock awards may have an exercise price or calculation equal to, less than or greater than the fair market value of the common stock on the date of grant, except that the exercise price of incentive stock options must be equal to or greater than the fair market value of the common stock as of the date of grant. As of February 26, 2004, the closing price of the Company's common stock as reported on the Nasdaq SmallCap Market was $12.18 per share.

Unless the specific grant provides otherwise, options granted under the 2004 Plan vest and become exercisable with respect to 25% of the shares covered thereby on the first anniversary of the date of grant and vest 1/36 th per month thereafter. The vesting date of other awards under the 2004 Plan is generally subject to the specific provisions of the individual award.

Awards to any individual participant under the 2004 Plan are limited to a maximum of 400,000 shares of common stock in any one tax year of the Company. The Compensation Committee shall determine the methods by which options can be exercised, including, without limitation, by (i) delivery of cash or wire transfer for the aggregate exercise price; (ii) delivering a notice of exercise together with irrevocable instructions to a broker to deliver sales proceeds in the amount of the aggregate exercise price to the Company; (iii) delivery of shares of common stock previously owned by the participant for at least six months with a fair market value equal to the aggregate exercise price; (iv) electing to have the Company retain shares of common stock or (v) any combination of the foregoing methods.

AMENDMENT OR TERMINATION OF THE 2004 PLAN

The Board may suspend, revise, terminate or amend the 2004 Plan at any time; provided, however, that stockholder approval must be obtained if and to the extent that the Board deems it appropriate to satisfy Section 162(m) of the Code, Section 422 of the Code or the rules of any stock exchange on which the common stock is listed. No action under the 2004 Plan may, without the consent of the participant, reduce the participant's rights under any outstanding award.

Doesn't that seem to indicate the board can do whatever it thinks it wants to, even amending the Plan? See why I would like to know what kind of options these are? Let's say they all buy at 37 cents, or whatever the stock is today. Then they temporarily hit the lottery in Utah, and the stock goes to teh moon, temporarily, and then they start to sell fast. What? You think it couldn't happen? Don't you remember 2003? Yes, there may be restrictions. But here are some definitions:
(u) "Phantom Stock" shall mean the right, granted pursuant to Section 11 of the Plan, to receive in cash the Fair Market Value of a share of Common Stock...

(x) "Restricted Stock" shall mean a share of Common stock that is granted pursuant to the terms of Section 10 of the Plan and that is subject to the restrictions set forth in Section 10 of the Plan.

(y) "Restricted Stock Unit" shall mean any unit granted under Section 10 of the Plan evidencing the right to receive a share of Common Stock (or a cash payment equal to the Fair Market Value of a share of Common Stock) at some future date.

Still think the money is only travelling one way? I read all that as saying they can do whatever they want when issuing options, pretty much. That's why I think it matters what kind they are, even if the Change of Control Agreement is no longer in effect, something we just don't know, or I don't.

Let's look at Section 10 and Section 11. If you find it handier, we have on our Contracts page under SCO Group a link to this document filed with the SEC in text:

10. Restricted Stock and Restricted Stock Units.

(a) Issue Date and Vesting Date.

At the time of the grant of shares of Restricted Stock, the Committee shall establish an Issue Date or Issue Dates and a Vesting Date or Vesting Dates with respect to such shares, or in the case of Restricted Stock Units, a Vesting Date or Vesting Dates. The Committee may divide such shares or units into classes and assign a different Issue Date and/or Vesting Date, as applicable, for each class. If the grantee is employed by the Company or a Subsidiary of the Company on an Issue Date (which may be the date of grant), the specified number of shares of Restricted Stock shall be issued in accordance with the provisions of Section 10(e) of the Plan. Provided that all conditions to the vesting of a share of Restricted Stock imposed pursuant to Section 10(b) of the plan are satisfied, and except as provided in Section 10(g) of the Plan, upon the occurrence of the Vesting Date with respect to a share of Restricted Stock, such share shall vest and the restrictions of Section 10(c) of the Plan shall lapse.

(b) Conditions to Vesting.

At the time of the grant of shares of Restricted Stock or Restricted Stock Units, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate.

(c) Restrictions on Transfer Prior to Vesting.

Prior to the vesting of a share of Restricted Stock or a Restricted Stock Unit, no transfer of a Participant's rights with respect to such share, whether voluntary or involuntary, by operation of law or otherwise, shall be permitted. Immediately upon any attempt to transfer such rights, such share or units, and all of the rights related thereto, shall be forfeited by the Participant.

(d) Dividends on Restricted Stock.

The Committee in its discretion may require that any dividends paid on shares of Restricted Stock shall be held in escrow until all restrictions on such shares have lapsed.

(e) Issuance of Certificates.

(1) Reasonably promptly after the Issue Date with respect to shares of Restricted Stock, the Company shall cause to be issued a stock certificate, registered in the name of the Participant to whom such shares were granted, evidencing such shares; provided, that the Company shall not cause such a stock certificate to be issued unless it has received a stock power duly endorsed in blank with respect to such shares. Each such stock certificate shall bear the following legend: The transferability of this certificate and the shares of stock represented hereby are subject to the restrictions, terms and conditions (including forfeiture provisions and restrictions against transfer) contained in the 2004 Omnibus Stock Incentive Plan of The SCO Group, Inc. and an Award Agreement entered into between the registered owner of such shares and The SCO Group, Inc. A copy of such Plan and Award Agreement is on file in the office of the Secretary of The SCO Group, Inc., 320 South 520 West, Suite 100, Lindon, Utah 84042. Such legend shall not be removed until such shares vest pursuant to the terms of the applicable Award Agreement.

(2) Each certificate issued pursuant to this Section 10(e), together with the stock powers relating to the shares of Restricted Stock evidenced by such certificate, shall be held by the Company unless the Committee determines otherwise.

(f) Consequences of Vesting.

Upon the vesting of a share of Restricted Stock or a Restricted Stock Unit pursuant to the terms of the applicable Award Agreement, the restrictions of Section 10(c) of the Plan shall lapse, except as otherwise provided in the Award Agreement. Reasonably promptly after a share of Restricted Stock vests, the Company shall cause to be delivered to the Participant to whom such shares were granted, a certificate evidencing such share, free of the legend set forth in Section 10(e) of the Plan, together with any dividends held in escrow pursuant to Section 10(d) of the Plan.

(g) Effect of Termination of Employment.

(1) Subject to such other provision as the Committee may set forth in the applicable Award Agreement, and to the Committee's amendment authority pursuant to Section 4 of the Plan, upon the termination of a Participant's employment by the Company or any Subsidiary of the Company for any reason other than Cause, any and all shares of Restricted Stock or Restricted Stock Units that have not vested shall be immediately forfeited by the Participant and transferred to the Company, provided that if the Committee, in its sole discretion and within 30 days after such termination of employment notifies the Participant in writing of its decision not to terminate the Participant's rights in such shares or units, then the Participant shall continue to be the owner of such shares or such units subject to such continuing restrictions as the Committee may prescribe in such notice. If shares of Restricted Stock are forfeited in accordance with the provisions of this Section 10, the Company shall also have the right to require the return of all dividends paid on such shares, whether by termination of any escrow arrangement under which such dividends are held or otherwise.

(2) In the event of the termination of a Participant's employment for Cause, all shares of Restricted Stock or Restricted Stock Units granted to such Participant that have not vested as of the date of such termination shall immediately be returned to the Company, together with any dividends paid on such shares of Restricted Stock.

(h) Effect of Change in Control.

Upon the occurrence of a Change in Control, all outstanding shares of Restricted Stock or Restricted Stock Units that have not theretofore vested shall immediately expire and be cancelled.

(i) Special Provisions Regarding Restricted Stock Awards.

The Committee may designate on a case-by-case basis whether Restricted Stock or Restricted Stock Unit awards are intended to be "performance based compensation" within the meaning of Code Section 162(m). The grant of Restricted Stock or Restricted Stock Units so designated shall be based on the attainment by the Company (or a Subsidiary or division of the Company if applicable) of performance goals pre-established by the Committee, based on one or more of the following criteria: (i) the attainment of a specified percentage return on total stockholder equity of the Company; (ii) the attainment of a specified percentage increase in earnings per share of Common Stock; (iii) the attainment of a specified percentage increase in net income of the Company; and (iv) the attainment of a specified percentage increase in profit before taxation of the Company (or a Subsidiary or division of the Company if applicable). Attainment of any such performance criteria shall be determined in accordance with generally accepted accounting principles as in effect from time to time. Such shares shall vest only after the attainment of such performance measures have been certified by the Committee.

11. Phantom Stock.

(a) Vesting Date.

At the time of the grant of shares of Phantom Stock, the Committee shall establish a Vesting Date or Vesting Dates with respect to such shares. The Committee may divide such shares into classes and assign a different Vesting Date for each class. Provided that all conditions to the vesting of a share of Phantom Stock imposed pursuant to Section 11(c) of the Plan are satisfied, and except as provided in Section 11(d) of the Plan, upon the occurrence of the Vesting Date with respect to a share of Phantom Stock, such share shall vest.

(b) Benefit Upon Vesting.

Upon the vesting of a share of Phantom Stock, the Participant shall be entitled to receive in cash, within 30 days of the date on which such share vests, an amount equal to the sum of (i) the Fair Market Value of a share of Common Stock on the date on which such share of Phantom Stock vests and (ii) the aggregate amount of cash dividends paid with respect to a share of Common Stock during the period commencing on the date on which the share of Phantom Stock was granted and terminating on the date on which such share vests.

(c) Conditions to Vesting.

At the time of the grant of shares of Phantom Stock, the Committee may impose such restrictions or conditions to the vesting of such shares as it, in its absolute discretion, deems appropriate.

(d) Effect of Termination of Employment.

(1) Subject to such other provisions as the Committee may set forth in the applicable Award Agreement, and to the Committee's amendment authority pursuant to Section 4 of the Plan, shares of Phantom Stock that have not vested, together with any dividends credited on such shares, shall be forfeited upon the Participant's termination of employment for any reason other than Cause.

(2) In the event of the termination of a Participant's employment for Cause, all shares of Phantom Stock granted to such Participant that have not vested as of the date of such termination shall immediately be forfeited, together with any dividends credited on such shares.

(e) Effect of Change in Control.

Upon the occurrence of a Change in Control, all outstanding shares of Phantom Stock that have not theretofore vested shall immediately expire and be cancelled.

(f) Special Provisions Regarding Phantom Stock Awards.

The Committee may designate on a case by case basis whether Phantom Stock awards are intended to be "performance based compensation" within the meaning of Code Section162 (m). The grant of Phantom Stock so designated shall be based on the attainment by the Company (or a Subsidiary or division of the Company if applicable) of performance goals pre-established by the Committee, based on one or more of the following criteria: (i) the attainment of a specified percentage return on total stockholder equity of the Company; (ii) the attainment of a specified percentage increase in earnings per share of Common Stock; (iii) the attainment of a specified percentage increase in net income of the Company; and (iv) the attainment of a specified percentage increase in profit before taxation of the Company (or a Subsidiary or division of the Company if applicable). Attainment of any such performance criteria shall be determined in accordance with generally accepted accounting principles as in effect from time to time. Such shares shall be released from restrictions only after the attainment of such performance measures have been certified by the Committee.

Do you find those "restrictions" compellingly reassuring? The options have to vest. That's it. And that may not matter anyhow, in that they may have already vested. And what if they are grants of phantom stock? And isn't this saying that while the directors are paying for the options now, when they do vest, the company has to pay them in cash? I mean, they don't even have to sell them on the open market, do they? Shouldn't the court get to see the Award Agreement too that is mentioned, not just the Plan, since the restrictions are not spelled out? Then there's the case by case workarounds. I'm sure the committee thinks they've all performed to the max, after all, if these are morphed somehow into performance options.

And if there is a disbursal to any creditors and shareholders someday, or a vote needs to be taken on something momentous, would it matter how many options/shares a person had in his name? Can you really not imagine a scenario where that 50% figure might really matter?

Before the court assumes that the 2004 Omnibus Plan is just hunky dory, I would suggest also that they carefully peruse the documents filed in the Canopy-Yarro litigation, which was about such plans. It might want to at least go over it with a fine tooth comb.

I guess you know what I think this is all about, without me having to put it into words. And the worst of it is that I think this does incentivize them, all right. It incentivizes them to keep wasting assets to reach for the golden ring for this little circle by pursuing litigation I don't believe the company can win in the end. Do they even care, if their shorter-term dreams come true?

That's the perfect name for a SCO case, though, don't you think? Oil and Grease on Wheels, Inc. v. Medicare Supply Co. of New England. I think that's what I should call my chapter on SCO's adventures in bankruptcy court when I write my book someday, "Oil and Grease on Wheels".

Updated: Since this topic is largely impenetrable, I am going to add any info posted in comments that might help us figure it out better. To start, here's Rule 144, which is about restricted stock and when you can sell it:

The rule's five conditions are summarized below:

1. Holding Period. Before you may sell any restricted securities in the marketplace, you must hold them for a certain period of time. If the company that issued the securities is subject to the reporting requirements of the Securities Exchange Act of 1934, then you must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year. The relevant holding period begins when the securities were bought and fully paid for.

The pebble in SCO's shoe seems to be this requirement:
Adequate Current Information.

There must be adequate current information about the issuer of the securities before the sale can be made. This generally means that the issuer has complied with the periodic reporting requirements of the Exchange Act.

Which SCO is behind on. Of course, that can be fixed and likely will be fairly soon, according to what we heard at the last bankruptcy hearing. As I read it, this rule sets limits on when you can sell, but basically it seems to be about getting the restricted language removed from the certificate, all other requirements being met, and on disputes about that, it says this:
If a dispute arises about whether a restricted legend can be removed, the SEC will not intervene. The removal of a legend is a matter solely in the discretion of the issuer of the securities. State law, not federal law, covers disputes about the removal of legends. Thus, the SEC will not take action in any decision or dispute about removing a restrictive legend.

A reader contributes this link to a PBS Hour transcript, Officials Investigate CEOs in Stock Options Scandals, and raises the question I don't know the answer to, namely which day will the fair market value be calculated from? August? December? When the Court authorizes them to issue officially?

PAUL SOLMAN:.. It's perfectly legal, but there is a catch for executives trying to maximize profits and keep you shareholders content. While options granted at today's stock price don't have to be deducted from profits, "in the money" options do. So grant a $30 option when there's $100 stock price and $70 gets pulled from profits for every option issued.

DONALD LANGEVOORT: If the stock option is granted "in the money," you do have to put on the financials that portion that represents the "in the money." That does become an expense; that does reduce the company's earnings. Companies hated that. They didn't want to take that hit.

PAUL SOLMAN: Because you investors didn't want lower profits. Talk about dilution. Some of you investors might have thought you were getting soaked. So some executives fudged. They issued options at today's stock price. It's just that they were flexible with the meaning of the word "today." In fact, they backdated the options to a time when the stock price was lower.

Here's a chart on Google, showing weekly prices on SCO's stock so you can see the prices in August, December and today. Or go here and set the variables any way you wish. If you do that, I think you will see a stock price decline from 0.14 to 0.09 on August 6-7, then over 900,000 shares traded on August 24-26 pushing the stock up to 0.35 a share.

Also someone points out that the dates on Exhibit B are possibly expiration dates, not vesting dates. And another reader noticed that on page 13 of the linked SEC document in the Director Compensation section it says: "Directors employed by us or one of our subsidiaries are not compensated for service on the Board or on any Committee of the Board." So that would explain Darl not being on the list.

Another reader did some math:

Strike prices are listed in exhibit B. Each of the six directors listed gets the same number of options, same dates, same strike prices; they sum up as follows:

10,000 shares @ $0.15
55,000 shares @ $0.13
35,000 shares @ $0.10
10,000 shares @ $0.08
which is a total of 110,000 shares each at an average strike price of 12.95 cents per share.

That's cents, not dollars. But the price as of today is 37 cents or thereabouts.

Update 2: I went to take a look at the proposed sale of some assets proposed back in February of 2009. And I found something I never noticed before. In Exhibit A [PDF], the proposed Asset Purchase Agreement, attached to the Motion [PDF] asking for confirmation of one of SCO's failed, weird reorganization plans, look at this section about the computer code, on page 20:

(f)(i) Except as set forth in Schedule 5.9(f), no Computer Software included within Company Technology has been delivered or made available to any third party in source code form, and no Seller has agreed to or undertaken to provide any such Computer Software in source code form to any third party; ...

(j) Except as set forth in Schedule 5.9(j), none of the Computer Technology constitutes or is dependent on any open source computer code, and none of the Company Technology is subject to any license or other Contractual Obligation that would require the Sellers to divulge to any Person any source code or trade secret that is part of the Computer Technology.

I wonder if that is true? After all the GPL distribution we've found, if SCO's theories about tree branches and tree trunks were true, then I think the GPL represents a license with obligations on SCO regarding the code. And as for equity interests, I note that they attached a form [PDF], in connection with another motion to get approval for some kind of auction and also establishing voting on the proposed reorganization, for those holding Class 5 equities to vote on the reorganization plan, and they were to list how many shares they held. Here's the form [PDF] for the type whose interests were "impaired" and thus not able to vote.

In an earlier proposed plan, as you can see on page 15 of this document [PDF], equity holders had their shares wiped out but then the new owner would issue equivalent shares in the new reorganized SCO. Holders of common stock, the old ones, got a cash disbursement from the new SCO. It mentions them receiving "an initial distribution from Trust", meaning the new SCO, where the new stock would be held, "less amounts reserved for fees and expenses of the Trust, which amount shall be funded by Reorganized SCO and shall be distributed by the Trust pro rata to such Holders based on their beneficial interests in the Trust." Then, some time within the next year, after SCO v. Novell was decided with finality, "Reorganized SCO will redeem all shares of New Common Stock held by the Trust (including shares of New Common stock issued or issuable in respect of options and warrants to purchase shares of New Common Stock held by the Trust) for the Redemption Price. The Trust will distribute the proceeds of the Redemption Price to the beneficial owners of the Trust, pro rata based on their former interests in the Old Common Stock and Old Common Stock equivalents." Then look at this part:

Further, the Trust shall provide for liquidating distributions to all beneficiaries of the Trust if the following events occur before the New Common Stock held by the Trust is redeemed under the foregoing provisions, as follows:...

(ii) if all or substantially all of the assets of Reorganized SCO are sold (or any series of related transactions results in the sale or other transfer of all or substantially all of the assets of Reorganized SCO) or a merger, reorganization or other transaction in which holders of a majority of the outstanding voting control of Reorganized SCO immediately prior to the transaction do not own a majority of the outstanding voting shares of the surviving corporation occurs, the proceeds of such sale or other transaction which are payable to the Trust will be distributed to the beneficiaries of the Trust; and (iii) if Reorganized SCO voluntarily or involuntarily liquidates, dissolves or winds up, the proceeds payable to the Trustee in connection therewith shall be distributed to the beneficiaries of the Trust. In the event of a sale, merger or equivalent transaction, the minimum amount that will be distributed to the Trust will be equal to the Redemption Price. The final distribution to the Trust beneficiaries will be allocated between beneficiaries who are former Holders of Old Common Stock and those that are former Holders of Old Common Stock equivalents, based on the amount of proceeds available for distribution (expressed as a price per share of New Common Stock) and the exercise price of the options and warrants held by the Trust.

Page 18 goes into more details about issuing the new stock, for those who just can't get enough of this sort of thing, but one thing stands out in our current context: "On the Effective Date, Holders of Equity Interests (including options and warrants) in SCO Group will receive a pro-rata beneficial interest in the Trust." They don't just get the exact equivalent, I don't think, or they wouldn't have if this deal had happened, because it goes on to say:
The issuance to the Trust and terms of the options to purchase shares of New Common Stock will be governed by a stock option agreement between Reorganized SCO and the Trust that will provide, among other things, for (a) an exercise price per share equal to $.02 in excess of the current market value of the shares of Old Common Stock as of the Effective Date, as determined by Reorganized SCO's Board of Directors in good faith...
There are other options, but you catch the drift. Simply dripping in good faith, eh? Either that or it's a very complicated way to give away money to insiders before Novell can get paid. You decide. Again, this was a deal everyone objected to, and it died aborning, but it shows how they were thinking, and who knows what types of reorganization plans or schemes may be hatching that they know about but we, of course, do not?

  View Printable Version


Groklaw © Copyright 2003-2013 Pamela Jones.
All trademarks and copyrights on this page are owned by their respective owners.
Comments are owned by the individual posters.

PJ's articles are licensed under a Creative Commons License. ( Details )