De-mystifying Stock Holdings and Key Terms: Part II

When a company is taken private:

All outstanding shares of a publicly held company are bought by an investor group which runs the company privately (often, senior management is part of the buyout).

-This is similar to a merger, but you need to find whether your prospect was a seller or a buyer.

-Prior to the shareholder vote, several “TOs” (tender offers) may be filed, describing the proposed deal (same with hostile buyouts.)

If your prospect was a seller, treat their stock as in any other buyout.

Check previous annual proxy for “change of control” benefits.

If your prospect was part of the buyout group:

Where did the buyout money come from?

What happened to your prospect’s stock?

Did your prospect get a bonus or other payment?

Restricted Stock:

Restricted stock is awarded to directors of a company as an incentive that can be realized only if certain conditions are met.

-Time based: vests on X day if they’re still with the company. Value these separately from actual holdings.

-Performance based:  awarded if you achieve X, do not value unless requirements are almost all met.

-Termination benefit tables will show what happens to restricted stock if the awardee dies, retires, becomes disabled or leaves for “good cause” before vesting.

-If they’re fired, quit, or take another job before vesting occurs, assume the restricted stock is forfeited unless you see an agreement.

Deferred Stock (a.k.a. “phantom shares”):

The executive or director does not have these shares, they have credit for them on paper that will be paid out at the plan exit date.

-Executive long term incentive plan: usually three years and paid out in year four, the amount credited depends on company performance.

-Executives may defer all or part of their salary/bonus until retirement.

-Director’s deferral:  paid out when they leave the board.

Normal dividends are credited on the “paper” shares as reinvestment.

When the time comes to collect, they can take either stock or cash (value of the shares at the time of the payout).

Stock Options:

It’s the right to buy X shares from the comp any at exercise price (also called strike price).

                -Unlike restricted stock, the awardee must pay to get the shares.

                -Exercise price is normally the average market price on the day it’s granted.

                -Options have a vesting schedule and an expiration date.

                -For basic valuation of stock options: current market price minus exercise price.

As always, we welcome your questions or comments!