Stock Option Plans

By: Antoine del Sordo.

The stock option plans provide a right, usually in favor of directors or managers (indistinctly referred to as "officers") of a company, to acquire certain number of shares issued by the company they manage, of the parent company, or of the subsidiary at a certain price and within a determined term.

These plans are implemented through agreements between the company and the board of directors or with the director or manager to whom said benefit will be granted. This mechanism is usually awarded according to the relevance of the permanence of said members in the company or as a reward for meeting particular specific objectives, thereby seeking to reinforce the institutionalization and loyalty of the company's managers, as well as to align the interests of the board of directors with those of the shareholders.

However, stock option plans must be adequately regulated to prevent, for instance, that the officer of the company who became a shareholder does no longer obtain the positive results he/she achieved before exercising his option right due to a loss of interest, or even his/her resignation to the company to take a managerial position in another company -even with the competition- but remaining as a shareholder in the company. Thereby depending on the particularities of each company, the specific regulation of the option right must be devised.

The following are some proposals for the regulation of this benefit:

1. Stricto sensu share option plans:

It consists of a mechanism by which the directors or managers of a company are granted with an option to acquire a package of issued and unsubscribed shares of the company, the exercise of which will be subject to a condition precedent consisting in the fulfillment of specific objectives during a determined period.

2. Stock option plans with extended issuance:

A share subscription option plan similar to the one described in the immediately preceding item, but that additionally avoids falling for a prolonged period in the case established in Article 133 of the General Law on Commercial Companies (prevention to issue new shares unless those of last share issuing have been fully subscribed and paid), consists in postponing the issuance of shares until the agreed upon objectives are met, granting a term - e.g., three months as of the goals are met- so that the beneficiary of the right can exercise it. The above mentioned assumes that from the beginning, the exercise price upon which the officer will be able to acquire the share package was previously agreed upon. Same price that, considering that the purchase option is a mechanism of remuneration or recognition from the company to the officer, if he/she meets the agreed-upon goal, it will be lower than the expected market price that the shares will have at the time of the option exercise by the officer.

.It is essential to distinguish the stock option plans from a variation of this type of agreements that are not strictly a mechanism by which an officer can become a shareholder of the company, such as the so-called ghost stock options. Through this type of agreement, the company agrees to pay a bonus to the officer equal to (i) the value of a certain number of shares if the agreed-upon goals are met, or (ii) the increase in value that said package of shares has over a specific time. As it can be inferred, this mechanism translates into the payment of an amount of money for the fulfillment of objectives whose "exercise price" is determined by the value of the company's shares, but in contrast to the stock option plans previously referred, does not imply a real option for the beneficiary to acquire shares of the company.

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