Stock option plans are the large contracts that govern stock
options programs. Stock option agreements are the individual
options grants, vesting schedules, and other
employee-specific information.
Stock option plans are written by lawyers. The language is
difficult to understand - employees, human resource
professionals, even top executives have a tough time
interpreting stock option plans.
Salary.com asked some of its stock options experts to
interpret a stock option plan from Dell Computer Corporation.
Bill Coleman and Keith Fortier, neither of whom is a lawyer,
have summarized each section in plain English and explained
why it matters to the person who has stock options under the
plan. The sections in italics are the actual language of the
plan; the sections in regular type are Salary.com's
interpretation. Overall, the Dell plan says the following.
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This is a stock option plan for employees of Dell and its
subsidiaries, excluding employees above level "D2"
(director level).
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This is just one of several stock and incentive programs
for Dell, each of which has its own legal plan document.
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This plan authorizes 7 million shares. At the time this
plan was issued, there were 1.3 billion shares outstanding.
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The plan awards nonqualified stock options only, at a price
equal to fair market value at grant.
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Vesting and length of individual option awards are made on
a discretionary basis.
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The office of the CEO administers the plan.
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The special circumstances discussed include change of
control, employees outside the United States,
recapitalization, and restructuring.
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The name of the plan was amended and restated as of Oct.
30, 1998.
AMENDED AND RESTATED
DELL COMPUTER CORPORATION
1998 BROAD-BASED STOCK OPTION PLAN
EFFECTIVE DATE: OCTOBER 30, 1998
I. PURPOSE OF THE PLAN
The DELL COMPUTER CORPORATION 1998 BROAD-BASED STOCK OPTION
PLAN (the "Plan") is intended to provide a means whereby
certain employees of DELL COMPUTER CORPORATION, a Delaware
corporation (the "Company"), and its subsidiaries may develop
a sense of proprietorship and personal involvement in the
development and financial success of the Company, and to
encourage them to remain with and devote their best efforts
to the business of the Company, thereby advancing the
interests of the Company and its stockholders. Accordingly,
the Company may grant to certain employees ("Optionees") the
option ("Option") to purchase shares of the common stock of
the Company ("Stock"), as hereinafter set forth. The only
options which may be granted under the Plan shall be options
which do not constitute incentive stock options, within the
meaning of section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code").
Purpose
The plan was implemented to give employees a sense of
ownership, and to encourage them to stay with the company
longer. The plan only awards nonqualified stock options, not
incentive stock options, as defined in Section 422 (b) of the
Internal Revenue Code.
Why this matters. Incentive stock options can be
better for employees than nonqualified stock options because
the taxes can be lower.
II. ADMINISTRATION
The Plan shall be administered by the Office of the Chief
Executive Officer of the Company (the "OOC"). The OOC shall
have sole authority to select the Optionees from among those
individuals eligible hereunder and to establish the number of
shares which may be issued under each Option. In selecting
the Optionees from among individuals eligible hereunder and
in establishing the number of shares that may be issued under
each Option, the OOC may take into account the nature of the
services rendered by such individuals, their present and
potential contributions to the Company's success and such
other factors as the OOC in its discretion shall deem
relevant. The OOC is authorized to interpret the Plan and may
from time to time adopt such rules and regulations,
consistent with the provisions of the Plan, as it may deem
advisable to carry out the Plan. All decisions made by the
OOC in selecting the Optionees, in establishing the number of
shares which may be issued under each Option and in
construing the provisions of the Plan shall be final.
Administration
The management team in the office of the CEO administers the
plan and decides who will receive options, how many options
to give each participant, when participants will receive
options, and the terms of each option grant. The plans are
sometimes administered by the Compensation Committee and/or
the Board of Directors.
Why this matters. Since the vesting period and the
number of options are not part of the plan itself, these
things are negotiable.
III. OPTION AGREEMENTS
(a) Each Option shall be evidenced by a written agreement
executed on behalf of the Company ("Option Agreement") which
shall contain such terms and conditions as may be approved by
the OOC. The terms and conditions of the respective Option
Agreements need not be identical. Any question as to the
interpretation of any provision of an Option Agreement,
including the determination of the existence or nonexistence
of a specified condition or circumstance, shall be determined
by the OOC, and its determination shall be final.
(b) The OOC may at any time and from time to time, in its
sole discretion, accelerate the time at which an Option then
outstanding may be exercised. Any such action by the OOC may
vary among individual Optionees and may vary among Options
held by any individual Optionee.
(c) For all purposes under the Plan, the fair market value of
a share of Stock on a particular date shall be equal to the
average of the high and low sales prices of the Stock (i)
reported by the Nasdaq National Market on that date or (ii)
if the Stock is listed on a national stock exchange, reported
on the stock exchange composite tape on that date; or, in
either case, if no prices are reported on that date, on the
last preceding date on which such prices of the Stock are so
reported. If the Stock is traded over the counter at the time
a determination of its fair market value is required to be
made hereunder, its fair market value shall be deemed to be
equal to the average between the reported high and low or
closing bid and asked prices of Stock on the most recent date
on which Stock was publicly traded. In the event Stock is not
publicly traded at the time a determination of its value is
required to be made hereunder, the determination of its fair
market value shall be made by the OOC in such manner as it
deems appropriate.
(d) Each Option and all rights granted thereunder shall not
be transferable other than by will or the laws of descent and
distribution.
(e) As used in Option Agreements, the following terms shall
have the respective meanings set forth below:
(i) "Disability" shall mean, with respect to a person, a
physical or mental impairment of sufficient severity that, in
the opinion of the Company, the person is unable to continue
performing the duties the person performed before such
impairment and that impairment or condition is cited by the
Company as the reason for termination of the person's
employment with the Company and its Subsidiaries (as defined
below).
(ii) "Normal Retirement" shall mean, with respect to a
person, the termination of such person's employment with the
Company and its Subsidiaries by reason of retirement at any
time on or after the date on which the person reaches age 65
if the person is employed in the United States of America or
such other age as provided for by the OOC as the normal
retirement age in the country where the person is employed.
Option agreements
Option agreements are put into writing, including in
particular the discretionary aspects of individual
agreements, such as vesting, terms of the option, etc. The
company can decide to accelerate vesting if it wants to. The
fair market value of the stock price is defined as the
average of the high and low sales price for a particular day,
not the closing price; and it is used later in determining
the exercise price. Transfer rules and exercise rights are
defined. Disability and normal retirement are defined. Rules
of separation for special treatment are defined.
Why this matters. You usually can't transfer the
options before exercising them. Terms are defined because
death, disability, and retirement are often cases of special
treatment. Types of special treatment include accelerated
vesting and longer terms to exercise options.
IV. ELIGIBILITY OF OPTIONEE
Options may be granted hereunder to any individual who (a) is
an employee of the Company or any Subsidiary of the Company
at the time the Option is granted and (b) holds a position
with the Company or such Subsidiary that is within or below
the grade of "D2" (as specified in the Company's current
employee job and pay classification system) or equivalent.
For purposes of the Plan, the term "Subsidiary" of the
Company shall mean any corporation, limited partnership or
other entity of which a majority of the voting power of the
voting equity securities or a majority of the equity
interests is owned, directly or indirectly, by the Company.
Eligibility of optionee
Eligibility is specifically defined, and subsidiary is
defined for purposes of eligibility. Exclusion is also
defined ("D2" above).
Why this matters. This exclusion leads one to conclude
that Dell also has other stock option plans.
V. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under
Options granted under the Plan shall not exceed 7,000,000
shares of Stock. Such shares may consist of authorized but
unissued shares of Stock or (where permitted by applicable
law) previously issued shares of Stock reacquired by the
Company. Any of such shares which remain unissued and which
are not subject to outstanding Options at the termination of
the Plan shall cease to be subject to the Plan, but, until
termination of the Plan, the Company shall at all times make
available a sufficient number of shares to meet the
requirements of the Plan. Should any Option hereunder expire
or terminate prior to its exercise in full, the shares
theretofore subject to such 2 Option may again be subject to
an Option granted under the Plan. The aggregate number of
shares which may be issued under the Plan shall be subject to
adjustment in the same manner as provided in Paragraph VIII
hereof with respect to shares of Stock subject to Options
then outstanding. Exercise of an Option in any manner shall
result in a decrease in the number of shares of Stock which
may thereafter be available by the number of shares as to
which the Option is exercised.
Shares subject to the plan
This section sets the number of shares available to grant and
where shares are issued from: authorized but unissued shares,
which means dilution. Previously issued shares are required
by the company (buyback). Any options granted and forfeited
go back into the pool, for example in the case of someone who
terminates employment without vesting, or underwater options
past the term. The aggregate number of shares is adjusted for
a stock split. (This is restated in section 8.)
Why this matters. The number of shares outstanding
affects the price per share. If the company issues new
shares, it is "diluting" the existing shares. For example, if
there are 100 shares outstanding at $1 per share, the company
is worth $100. If the company issues 10 new shares, but the
value of the company has not increased, each share is now
worth only 91 cents. Dell's dilution is very small: 1.3
billion plus 7 million over 1.3 billion, or about half a
percent. Dell is making up for the small dilution by creating
a means to recapture some outstanding shares.
VI. OPTION PRICE
The purchase price of Stock issued under each Option shall be
determined by the OOC, but such purchase price shall not be
less than 100 percent of the fair market value of Stock
subject to the Option on the date the Option is granted.
Option price
The purchase and strike price are defined. This plan does
not allow discounted stock options.
Why this matters. Since Dell is a public company whose
stock price has become relatively stable, this plan may have
less potential upside than that of a startup. The employee
has the option to purchase the stock at the market price as
of the date the options were issued, not at a discount. But
an employee who remains with the company for some time might
see some nice gains, if the stock price continues to climb.
VII. TERM OF PLAN
The Plan shall be effective upon the date of its adoption by
the Board of Directors of the Company (the "Board"). Except
with respect to Options then outstanding, if not sooner
terminated under the provisions of Paragraph IX, the Plan
shall terminate upon and no further Options shall be granted
after the expiration of ten years from the date of its
adoption by the Board.
Term of plan
The term is defined as 10 years. This does not imply,
however, that the option term is 10 years. Options that have
already been granted do not expire at the termination of the
plan.
Why this matters. This doesn't have a significant
impact on the employee granted options right now.
VIII. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Options granted
hereunder shall not affect in any way the right or power of
the Board or the stockholders of the Company to make or
authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any
issue of debt or equity securities, the dissolution or
liquidation of the Company or any sale, lease, exchange or
other disposition of all or any part of its assets or
business or any other corporate act or proceeding.
(b) The shares with respect to which Options may be granted
are shares of Stock as presently constituted, but if, and
whenever, prior to the expiration of an Option theretofore
granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock
dividend on Stock without receipt of consideration by the
Company, the number of shares of Stock with respect to which
such Option may thereafter be exercised (i) in the event of
an increase in the number of outstanding shares shall be
proportionately increased, and the purchase price per share
shall be proportionately reduced, and (ii) in the event of a
reduction in the number of outstanding shares shall be
proportionately reduced, and the purchase price per share
shall be proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital
stock, or otherwise changes its capital structure (a
"recapitalization"), the number and class of shares of Stock
covered by an Option theretofore granted shall be adjusted so
that such Option shall thereafter cover the number and class
of shares of stock and/or securities to which the Optionee
would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record
of the number of shares of Stock then covered by such Option.
If (i) the Company shall not be the surviving entity in any
merger, consolidation or other reorganization (or survives
only as a subsidiary of an entity), (ii) the Company sells,
leases or exchanges all or substantially all of its assets to
any other person or entity, (iii) the Company is to be
dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of
the 1934 Act, acquires or gains ownership 3 or control
(including, without limitation, power to vote) of more than
50% of the outstanding shares of the Company's voting stock
(based upon voting power), or (v) as a result of or in
connection with a contested election of directors, the
persons who were directors of the Company before such
election shall cease to constitute a majority of the Board
(each such event is referred to herein as a "Corporate
Change"), no later than (a) ten days after the approval by
the stockholders of the Company of such merger,
consolidation, reorganization, sale, lease or exchange of
assets or dissolution or such election of directors or (b)
thirty days after a change of control of the type described
in Clause (iv), the Board, acting in its sole discretion
without the consent or approval of any Optionee, shall act to
effect one or more of the following alternatives, which may
vary among individual Optionees and which may vary among
Options held by any individual Optionee: (1) accelerate the
time at which Options then outstanding may be exercised so
that such Options may be exercised in full for a limited
period of time on or before a specified date (before or after
such Corporate Change) fixed by the Board, after which
specified date all unexercised Options and all rights of
Optionees thereunder shall terminate, (2) require the
mandatory surrender to the Company by selected Optionees of
some or all of the outstanding Options held by such Optionees
(irrespective of whether such Options are then exercisable
under the provisions of the Plan) as of a date, before or
after such Corporate Change, specified by the Board, in which
event the Board shall thereupon cancel such Options and the
Company shall pay to each Optionee an amount of cash per
share equal to the excess, if any, of the amount calculated
in Subparagraph (d) below (the "Change of Control Value") of
the shares subject to such Option over the exercise price(s)
under such Options for such shares, (3) make such adjustments
to Options then outstanding as the Board deems appropriate to
reflect such Corporate Change (provided, however, that the
Board may determine in its sole discretion that no adjustment
is necessary to Options then outstanding) or (4) provide that
the number and class of shares of Stock covered by an Option
theretofore granted shall be adjusted so that such Option
shall thereafter cover the number and class of shares of
stock or other securities or property (including, without
limitation, cash) to which the Optionee would have been
entitled pursuant to the terms of the agreement of merger,
consolidation or sale of assets and dissolution if,
immediately prior to such merger, consolidation or sale of
assets and dissolution, the Optionee had been the holder of
record of the number of shares of Stock then covered by such
Option.
(d) For the purposes of clause (2) in Subparagraph (c) above,
the "Change of Control Value" shall equal the amount
determined in clause (i), (ii) or (iii), whichever is
applicable, as follows: (i) the per share price offered to
stockholders of the Company in any such merger,
consolidation, reorganization, sale of assets or dissolution
transaction, (ii) the price per share offered to stockholders
of the Company in any tender offer or exchange offer whereby
a Corporate Change takes place, or (iii) if such Corporate
Change occurs other than pursuant to a tender or exchange
offer, the fair market value per share of the shares into
which such Options being surrendered are exercisable, as
determined by the Board as of the date determined by the
Board to be the date of cancellation and surrender of such
Options. In the event that the consideration offered to
stockholders of the Company in any transaction described in
this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Board shall determine the fair
cash equivalent of the portion of the consideration offered
which is other than cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c)
above shall be subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance
by the Company of shares of stock of any class or securities
convertible into shares of stock of any class, for cash,
property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company
convertible into 4 such shares or other securities, and in
any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect
to, the number of shares of Stock subject to Options
theretofore granted or the purchase price per share.
Recapitalization or reorganization
Regardless of the implied promises of the plan, it can't
prevent or override any future recapitalization,
reorganization, or other major corporate events. If the stock
is restructured - for instance a stock split, reverse split,
or stock dividend - the shares authorized under the plan will
be adjusted accordingly.
This section determines what will happen if there is a change
of control in the company: if Dell is acquired, if it sells
all or most of the company, if the company dissolves or is
liquidated, or of there is a change of more than half of the
directors. If one of these things occurs, the board can do
one of four things with each outstanding option (it can do
different things for different people and different things
for different grants). It can accelerate vesting or the
ability to exercise; it can require the optionee to forfeit
the right to the option in exchange for cash settlement; it
can modify options to reflect the change of control; or it
can adjust them to keep the optionee whole (same economic
position).
The value of stock after a change of control is defined for
use in the previous section. If shareholders need to approve
action, it must be approved. The adjustments made to
outstanding options under this plan in the event of a change
of control are limited. Other items, like warrants and
outright shares owned, are not included.
Why this matters. This is very important language.
With the language above, if someone has 10,000 options with
an exercise price of $48, and a 2-1 split occurs, that person
would have twice as many shares at half the price (20,000
shares at a $24 strike price). The optionee's economic
position would not change. But if this language weren't here
and the stock split, the employee with 10,000 options with an
exercise at $48 would still have 10,000 options with an
exercise price of $48. The optionee would have the economic
equivalent of half the options at twice the strike price.
This happened to three top executives of Computer Associates
International Inc. in a highly publicized case in November
1999. The shareholders had never agreed to adjust the number
of shares awarded in the event of a stock split.
Consequently, a court ruled that the executives must forfeit
a potential gain of more than half a billion dollars.
IX. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any
time with respect to any shares for which Options have not
theretofore been granted. The Board shall have the right to
alter or amend the Plan or any part thereof from time to
time. In addition, the OOC (without the necessity of specific
Board action) shall have the power and authority to make or
approve revisions or modifications to the terms and
provisions of the Plan on behalf of the Board and from time
to time, so long as such revisions or modifications are (in
the judgment of the OOC) necessary, appropriate or desirable
to effectuate the purposes of the Plan and do not effect a
material change in the structure or purposes of the Plan.
Notwithstanding the above, however, no change in any Option
theretofore granted may be made which would impair the rights
of the Optionee without the consent of such Optionee.
Amendment or termination of plan
The board can make any change to the plan, including
termination, prior to its term. The OOC can also make changes
"without the necessity of board action." Neither the board
nor the OOC action will affect rights or promises associated
with options that have already been granted, unless the
optionee agrees. Examples are options repricing and
acceleration of vesting.
Why this matters. The company has considerable
latitude to change the plan, but if you already have options
under this plan, the changes won't affect you unless you
agree to them.
X. SECURITIES LAWS
(a) The Company shall not be obligated to issue any Stock
pursuant to any Option granted under the Plan at any time
when the offering of the shares covered by such Option have
not been registered under the Securities Act of 1933 (the
"Securities Act") and such other state, federal or foreign
laws, rules or regulations as the Company or the Board deems
applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration
requirements of such laws, rules or regulations available for
the offering and sale of such shares.
(b) The Company intends to register for issuance under the
Securities Act the shares of common stock issuable upon
exercise of Options and to keep such registration effective
throughout the period any Options are exercisable. In the
absence of such effective registration or an available
exemption from registration under the Securities Act,
issuance of shares of common stock issuable upon exercise of
Options may be delayed until registration of such shares is
effective or an exemption from registration under the
Securities Act is available. The Company intends to use its
best efforts to ensure that no such delay will occur. In the
event exemption from registration under the Securities Act is
available upon an exercise of Options, the Option holder (or
the person otherwise permitted to exercise such Options), if
requested by the Company to do so, shall execute and deliver
to the Company in writing an agreement containing such
provisions as the Company may require to assure compliance
with applicable securities laws.
(c) At the time of any exercise of an Option, the Company
may, as a condition precedent to the exercise of such Option,
require from the holder of the Option such written
representations, if any, concerning the holder's intentions
with regard to the retention or disposition of the shares of
stock being acquired pursuant to such exercise and such
written covenants and agreements, if any, as to the manner of
disposal of such shares as, in the opinion of counsel to the
Company, may be necessary to ensure that any disposition by
that holder will not involve a violation of the Securities
Act or any other applicable securities law or regulation.
(d) The certificates representing the shares of common stock
issued pursuant to an exercise of Options may bear such
legend or legends as the OOC deems appropriate in order to
assure compliance with applicable securities laws and
regulations. The Company may refuse to register the transfer
of the shares of common stock issued pursuant to an exercise
of 5 Options on the stock transfer records of the Company if
such proposed transfer would, in the opinion of counsel to
the Company, constitute a violation of any applicable
securities law or regulation, and the Company may give
related instructions to its transfer agent, if any, to stock
registration of the transfer of the shares of common stock
issued pursuant to an exercise of Options.
Securities laws
There is standard language regarding compliance with
federal, state, and SEC regulations. The company will not
have to offer shares unless they are duly registered by
jurisdictions governing the recipient. There is enabling
language for the SEC (Securities Act of 1933). All shares
issued under the plan need to be duly registered under the
Securities Act of 1933 unless exceptions apply. The company
will make a good faith effort to comply. The company will ask
for information regarding what the exercisor will do with the
shares (to comply with insider trading rules, potential
lockout periods, and restrictions on sale). The company will
comply with the SEC with a regard to restrictions of stock
certificates and may write actual restrictions on the face of
stock certificates.
Why this matters. Most option holders can ignore this
section, which more or less is boilerplate language that says
the company will abide by the laws governing securities. But
it is cause for alarm if your stock option plan doesn't
contain this or similar language.
XI. NON-U.S. EMPLOYEES
The OOC shall determine, in its discretion, whether it is
desirable or feasible under local law, custom and practice to
grant Options under the Plan to eligible employees described
in Paragraph IV in countries other than the United States. In
order to facilitate the grant of Options under this
Paragraph, the OOC may provide for such modifications and
additional terms and conditions ("special terms") in Option
awards to employees who are employed outside the United
States (or who are foreign nationals temporarily within the
United States) as the OOC may consider necessary, appropriate
or desirable to accommodate differences in local law, policy
or custom or to facilitate administration of the Plan. The
special terms may provide that the grant of an Option is
subject to (a) applicable governmental or regulatory approval
or other compliance with local legal requirements or (b) the
execution by the employee of a written instrument in the form
specified by the OOC, and that in the event such requirements
or conditions are not satisfied, the grant shall be void. The
special terms may (but need not) also provide that an Option
shall become exercisable if an employee's employment with the
Company and its Subsidiaries ends as a result of workforce
reduction, realignment or similar measure. The OOC may adopt
or approve sub-plans, appendices or supplements to, or
amendments, restatements or alternative versions of, the Plan
as it may consider necessary, appropriate or desirable for
purposes of implementing any special terms, without thereby
affecting the terms of the Plan as in effect for any other
purpose. The special terms and any appendices, supplements,
amendments, restatements or alternative versions, however,
shall not include any provisions that are inconsistent with
the terms of the Plan as then in effect, unless the Plan
could have been amended to eliminate such inconsistency
without further approval by the Board.
Non-U.S. employees
At the company's discretion, employees outside the United
States or foreign nationals working in the United States may
participate in the plan and modifications may be made to
comply with specific government regulations in other
countries.
Why this matters. Dell is an international
corporation. Employees working in offices in countries other
than the United States, and employees who are not U.S.
citizens, are not excluded from the plan.
XII. GOVERNING LAW
The Plan, and all Option Agreements issued under the Plan,
shall be governed by, and construed in accordance with, the
laws of the State of Delaware.
Governing law
Delaware is legal jurisdiction under this plan and all
agreements.
Why this matters. Delaware has the most favorable
corporate laws in the United States. Many businesses are
incorporated in Delaware. In the event of a legal action, the
prevailing laws would be favorable to the company.
- Johanna Schlegel, Salary.com Editor-in-Chief
