SEC backs stock repricings

A recent decision by the Securities and Exchange Commission that rejects shareholders' ability to challenge companies repricing employee stock options is raising the ire of investors groups.

At the same time, corporate attorneys are breathing a tentative sigh of relief.

Corporations whose stocks have fallen on hard times often lower the price of "underwater" stock options they offer in hopes of retaining executives and employees. The term "underwater" is applied to stock options that cost more than the price of the shares on the open market.

While executives often view repricings as a necessary move in order to stabilize a company, investors often stand opposed. They see it as an indication that the company is putting the interests of employees and executives before those of shareholders. Investors also complain that executives should not be rewarded when the company's stock is not performing well.

So when the SEC last week limited shareholders' ability to block option repricing--ruling that it is a compensation matter "involving the company's ordinary business operations" and exempted from laws that allow a majority of shareholders to block the move--it was met with a prompt appeal by investor groups.

The decision stems from a dispute between remote access provider Shiva and the State of Wisconsin Investment Board. In January, the $55 billion investment fund submitted a proposal that would have prevented Boston-based Shiva from repricing options without first obtaining shareholder approval.

Under SEC rules, a corporation is required to place shareholder proposals on its annual proxy unless executives can show that the proposal falls into a list of exceptions. Shiva argued that, because it concerned "general employee compensation," the proposal could be omitted from the company's 1998 proxy materials because the measure dealt with the company's ordinary business. In a letter dated March 10, SEC staffers agreed with Shiva and promised it would take no action against the corporation if it omitted the proposal.

John Heine, an SEC spokesman, said the letter should come as no surprise to either corporations or shareholders. "It was a fairly routine letter to write because the commission staff has taken that position over the years," he said.

The letter comes as more companies are undertaking repricings to rectify underwater stocks to retain employees. It also reaffirms the longstanding controversy between executive boards and investors, with the latter group speaking out against the SEC's move.

"If they said it for Shiva, they'll now say it for any company," said Bart Naylor, director of corporate affairs for the Teamsters Union. "This is a particularly terrible time for the SEC to comfort these companies because the stock market is at a record high and many stocks will decline. We're now handcuffed to do anything about it."

In a statement, John Nelson, Wisconsin's investment director, said the decision was flawed for a variety of reasons. "First, it preempts our state law right to amend bylaws and we don't think a federal agency ought to have the ability to do that," he added. "Second and most importantly to me as an owner, option repricing is clearly not a general compensation matter."

But the decision is welcome news to some executives, since it comes as the SEC is mulling over new rules concerning shareholder proposals. Corporate attorneys have feared that the new rules might give shareholders unprecedented new control over a variety of issues, including the repricing of stock options.

Diane Frankle, a securities attorney at Gray Cary Ware & Freidenrich, said that in light of the proposed rule changes now pending, the SEC's decision in the Shiva matter is remarkable.

"This is a significant development because it suggests the SEC's position will be more favorable to companies then we had feared," said Frankle, who represents corporations in the high-tech industry. Despite the SEC's consideration to give shareholders more input, she added, the letter "seems to be saying that not every compensation issue is going to be an appropriate issue for shareholder proposals."

Representatives from Shiva did not return phone calls seeking comment.