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Legal Question - Stock Options


Tim Eriksen
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Can the board of a US over the counter company issue "unlimited" stock options?  I have spent a lot of research time on this but cannot find a simple answer.  I know the exchanges have some restrictions as do states, and that company bylaws and articles of incorporation come into play, although boards can amend those.  But I am researching a company that authorized the issuance of 700,000 non-qualified stock options when there was only 2.1 million shares outstanding without presenting it to shareholders.  This seems ridiculous and to me should be illegal, but is it illegal?  What prevents a board from approving large plans every year?

 

It is also interesting in that the company was not holding annual meetings even though it was required by Delaware law.  The directors had been appointed nearly a decade earlier but had never been presented to shareholders for approval, thus their initial three year terms were actually expired. 

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When you form a company I believe it's required to state the number of authorized shares. This is true in PA, and I believe Delaware. A company can't issue more than what is authorized. Now in theory they could continually vote to authorize more shares if they wanted.

 

My guess is if the company were used this might not stand up in court. But the company is betting they won't be used or that anyone will even care.

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But I am researching a company that authorized the issuance of 700,000 non-qualified stock options when there was only 2.1 million shares outstanding without presenting it to shareholders.

 

Like Nate said, make sure you're comparing to shares authorized not outstanding.

They can't issue more than the shares that were authorized. If they are without going to shareholders to increase the number of shares authorized they most likely are breaking the law or the corporation's charter

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But I am researching a company that authorized the issuance of 700,000 non-qualified stock options when there was only 2.1 million shares outstanding without presenting it to shareholders.

 

Like Nate said, make sure you're comparing to shares authorized not outstanding.

They can't issue more than the shares that were authorized. If they are without going to shareholders to increase the number of shares authorized they most likely are breaking the law or the corporation's charter

 

It is not an issue of authorized shares.  Like many companies the number of authorized shares is much higher than the actual shares outstanding.  The issue is other than fiduciary duty what prevents substantial stock option dilution?  Listed companies are required to get shareholder approval if the number is above a certain level.  If a company issues incentive stock options (ISOs) they have to get shareholder approval.  In this case they issued non-statutory stock options. 

 

What makes it all the more strange is the company approved another stock option plan but it was voided because it did not get shareholder approval because they never presented it to shareholders since they weren't holding annual meetings.  But that just confuses why the earlier plan was allowable.

 

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Restrictions on the ability of an unlisted company's board to issue stock could arise from:  (i) the charter; (ii) the by-laws; (iii) the law of the state of incorporation; or (iv) a shareholders' agreement.  You referred to Delaware law, so I assume you're dealing with a Delaware corporation.  Section 157 of the Delaware General Corporation Law authorizes boards to issue stock options, subject to any restrictions in the charter.  The statute itself does not provide for any limit on the number of options that may be granted.  Instead, you must look to the general law of fiduciary duty and waste.

 

 

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