Opinion ID: 778512
Heading Depth: 3
Heading Rank: 1

Heading: The Formula Plan

Text: 23 For guidance as to the manner in which a formula plan under the Board Approval Exemption should fix in advance the terms and conditions of its constituent securities transactions, the Securities and Exchange Commission (SEC) release accompanying the promulgation of Rule 16b-3(d)(1) points to former Rule 16b-3(c)(2)(ii). See Ownership Reports & Trading by Officers, Dirs. & Principal Sec. Holders, Exchange Act Release No. 34-37260, 61 F.R. 30,376, at 30,381 n.71 (June 14, 1996) [hereinafter 1996 Release]. That former rule defined a formula plan as the grant or award of securities made pursuant to a plan that by its terms ... sets forth a formula that determines the amount, price and timing, using objective criteria. 17 C.F.R. § 240.16b-3(c)(2)(ii) (amended Aug. 15, 1996). A formula plan must be sufficiently prescriptive in order to prevent insiders from having, directly or indirectly, any control over the terms of their own awards, and therefore removes the ability of the insiders to time their acquisitions under the plan to take advantage of inside information. 1991 Release at 81,269. 24 Formula specificity further serves the goal, urged by the SEC as amicus curiae, of ensuring that the approving board gives due consideration to the securities transactions that will subsequently flow out of the formula plan, thereby evincing acknowledgment and accountability by the board as to its own actions. SEC Amicus Br. at 24 (internal quotation marks omitted). Of course, whether the formulae set forth in a given plan are adequately specific turns on the overall corporate context served by the plan's grant or award of securities. Are the securities being awarded solely as a form of special compensation to a limited number of highly influential insiders? Or are the securities instead being granted to all eligible option holders, without regard to status, as a means of fully effecting an overarching, value-adding corporate event (e.g., a merger)? Clearly, the latter scenario presents a diminished risk that the securities grants are not motivated by a legitimate corporate purpose and, as such, should generally require less in the way of formula specificity. 25 In respect of the securities transactions at issue in this case, we find that Article VI, Paragraph 6.1(a) of the Merger Agreement encapsulated the formula plan required for purposes of the Board Approval Exemption. All of the relevant terms and conditions of the Roberts-Shire option conversion were fixed within that single passage: 26 &#x2022; Who? All holders of Roberts options. 27 &#x2022; What do they receive? Shire options. 28 &#x2022; When? At the Effective Time of the Merger and without any action on the part of the [Roberts option] Holders. 29 &#x2022; In what quantity? An amount equal to the product of (1) the number of Roberts options held by the option holder immediately prior to the merger and (2) a stipulated exchange ratio. 30 &#x2022; At what exercise price? A price equal to the exercise price of the old Roberts option divided by the exchange ratio. 31 &#x2022; Under what governing terms? The duration and all other exercise terms of the converted Shire options would be identical to those of the old Roberts options. 32 In the detailed and prescriptive manner demanded of formula plans under former Rule 16b-3(c)(2)(ii), the option conversion provisions contained in Article VI, Paragraph 6.1(a) of the Merger Agreement left Roberts option holders no discretion unilaterally to alter in their favor the amount, price, timing and exercise terms of the impending option conversion. 4 Far from being open-ended, the Merger Agreement precisely delimited the securities grants that the individual defendants would ultimately receive on the effective date of the Merger. 33 The plaintiffs object that the Merger Agreement's formula plan failed to spell out the full names of all the individuals holding Roberts options prior to the Merger, the exact quantity of Roberts options held separately by each such person, and the actual exercise terms governing the Roberts options. Cf. Skadden, Arps, Slate, Meagher & Flom L.L.P., SEC No-Action Letter [1999 Transfer Binder], Fed. Sec. L. Rep. (CCH) ¶ 77,515, at 78,565-66 (Jan. 12, 1999) [hereinafter Skadden No Action Letter]. However, while we agree that listing such minutiae would not be inconsistent with the Board Approval Exemption, all-encompassing precision is not mandatory in every application of the exemption. This is particularly so where, as here, the three missing pieces of information were not free-floating variables manipulable by the future beneficiaries of the Roberts-Shire option conversion. 34 Whether or not separately identified in the formula plan, all holders of Roberts options at the moment of the Merger would receive converted Shire options — and the Shire board, by approving the formula plan, would so be aware. Whether or not quantified according to individual holdings, all extant Roberts options would be converted — and, again, the Shire board would so be aware. Finally, whether or not reprinted verbatim in the Merger Agreement, the terms previously governing the Roberts options would still govern the converted Shire options — and, as before, the Shire board would so be aware. 35