While your company may have put months of thought and planning into acquiring a company, the handling of equity plans is typically something that must be sorted out and dealt with quickly, efficiently, and often at the last minute. Even in the best of cases, where the stock plan group is brought in early in the process, a lot of the data you need to work with may not be accessible until after the deal is complete. Therefore, you need to be ready to spring into action at a moment's notice, which makes. due diligence critical. This article is intended to provide you with many of the critical questions to which you need answers BEFORE you get started.

The best place to start is to understand the timing of the transaction. When is the acquisition planned to take place? What might cause the date to be pushed or pulled in? What is the likelihood that a change will happen and how (and how fast) will you be notified? How quickly will you be expected to complete your portion of the project? The answers to these questions will allow you to begin setting up your timeline. It is crucial that you immediately compare the required M&A timeline with your other regularly-scheduled activities. If the expectations of you and your team are not realistic, make that clear earlier rather than later. Make your concerns and solution clear - do you need more time, more help or more what? Once the process begins, it is too late and you WILL BE held accountable for meeting those improbable/impossible deadlines.

The next step is to understand the terms of the acquisition and how they apply to each equity plan. At this juncture, it is not just about asking questions it is key to do your own homework. Read the actual acquisition documents from start to finish. Highlight any areas that do/may apply to stock options, restricted stock awards/units, ESPP, insiders, conversion ratios for shares/prices, rounding methodology for shares/prices, etc. The devil really is in the details. It is critical that the processing of the acquisition proceeds in exactly the manner it was documented and communicated, and according to the agreed-upon terms. There is no "close enough" in this situation! We suggest that you compile a document that outlines what needs to happen and have counsel confirm that you have all the details correct.

Once the general terms are confirmed, you need to dig a little deeper. What kinds of equity plans does the acquired company have? Will there be accelerations or vesting extensions? Will there be immediate terminations? Who are their Section 16 filers and how will that change? Will there be a final ESPP purchase and who will be responsible for processing it? Which system is the other company using? How/when will new employee IDs be assigned and how will you be notified? You now need to use all of this information to flesh out your timeline with each and every necessary step.

During this Due Diligence/Planning Phase there are likely some details you won't know until you can actually see the data which with you will be working. Your detailed timeline might have a couple of areas marked "TBD". For instance, you may not know how many ISOs will need to be accelerated which means you won't know if there will be ISO limit recalculations and/or how many, which means you don't know how much time that will take, etc. You may, therefore, need a few different paths planned out so that you will know exactly what to do when the time comes.

Next month we will walk you through the actual processing of the acquisition including how to get through some of the most common TBDs. 'Til then...

Product Spotlight: M&A Services and Solutions

This month's SOS Product Spotlight focuses on the solutions we deliver to our Clients involved in a merger or acquisition

Mergers and acquisitions are fraught with challenges, whether you are assuming, converting, or cashing out equity instruments. From conversion services to data audits to custom reports and participant communications to assistance with accounting under 141R, Stock & Option Solutions provides the services and tools that help you sail through the stock plan side of these complex transactions with minimum effort and maximum results.

How SOS can help:

General Management and Other Key Areas of Assistance

• Overall management, including project management of the Merger & Acquisition for Stock Plans
• Guidance on execution of the transaction terms while staying in compliance
• Guidance on the execution of the treatment of employees (retention concerns and payouts, severance treatment, acceleration triggers, special agreements, tax impact, reporting obligations etc.)
• Employee education development and delivery to reduce participant confusion and concerns, and ensure a successful transition
• Assistance with internal reporting requirements and documentation while maintaining SOX compliance concerns
• Understanding of the mechanics of the transaction terms, and how to best implement, accelerations, terminations, restricted stock issues, fractional share handling, special option issues, part-stock, part-cash deals, deferred compensation issues, performance vesting issue within your stock plan database.
• Assistance identifying ISO modifications due to the merger terms
• Assistance with accounting consequences as a result of the transaction, including customized reports to assist in complying with FAS 141R
• Communication to employees through customized reporting solutions - resulting with the employees receiving one simplified statement reflecting the changes and impact of the transaction.

• Generate country-specific communications for events related to Merger & Acquisition transactions (exchange or cash out of equity awards, explanation of awards for new employees of acquired foreign entities
• Pinpoint issues and questions for more detailed review with global tax and regulatory specialists

1. Due diligence: The first and arguably the most important part of the merger process is the due diligence work performed before the transaction is complete.
   Let SOS' experts assist you with:
   • Examination of plan documents
   • Understanding acceleration clauses and provisions
   • Severance agreements
   • Review of merger agreement and plan of merger
   • Understanding of the conversion ratio and impact to equity
   • Understanding the timing of events, transaction date vs. impact to equity
   • Blackout periods - if any - resulting from transaction

2. International Compliance:
   • Legally compliant to set up and do business if new locations will be acquired
   • Trustee or Financial Intermediary Requirements
   • Data privacy issues addressed
   • Translation issues
   • Security exemption trigger - headcount in existing countries vs. adding new employees
   • H1 Visa Issues for employees transferring to the US following transaction

3. Data Audit: Even if the system used by the target and buying companies is the same, the data must generally be moved from one database to another and consolidated. A best practice is to begin this process with a thorough data audit of the target company's database. Identifying issues early can prevent numerous problems for years to come.
   Audit items can include:
   • Shares Outstanding
   • Duplicate account
   • Duplicate Employee IDs
   • Duplicate SSN's
   • Different use of same/similar fields (user-defined fields, class, type, etc.)
   • Award number sequencing (need to understand in preparation of loading new grants to system) and duplicate award IDs
   • Completeness and accuracy of participant data
   • Completeness of year to date withholdings
   • Reconciliation of equity types issued to board minutes
   • ISO limits - have they been applied correctly?
   • Are the current withholding rates accurate?
   • How current is the employee data? Hire dates, termination dates, leave of absences, severance agreement or retirements, inactive accounts
   • Do historic market values match historic exercise prices?
   • Do historic grant prices match market value on grant date and board meeting minutes?

4. Conversion of data into new system: In the majority of mergers, converting data from one system to another is a necessary, but time-consuming and often painstaking process. SOS has processed numerous conversions for mergers, vendor implementations, etc. Let the SOS experts:
   • Apply Merger agreement terms to convert shares
   • Map and format files into new system required formats
   • Review the resulting vest schedules by auditing reports several years into future. Many times the concern is focused on converting and integrating the data based on the as of date of the merger or acquisition. SOS also checks the data at different points in time up to four years out to ensure that ongoing vesting has been converted correctly.
   • Provide a soft copy audit binder that contains reports and reconciliation from acquired company and acquiring company pre and post conversion.
   • Work with Exchange/Broker/Escrow for smooth transition

5. Process: Seldom do the processes of the acquiring company remain intact after a merger. From simple adjustments to complete overhauls, SOS can help you get your process and related documents revised and perfected to ease administration in the future.
   • Streamline/integrate stock option process into acquiring company's process
   • Document resulting processes
   • Update related documents for SOX compliance
   • On-going updates (demographic data, tax rates and changes to locations, etc.) for acquired company participants, timeline for full integration if delay is necessary

6. Accounting: FAS 141R (now ASC 805) has clarified and streamlined the treatment of equity grants in merger transactions. What used to require custom systems can now often be handled with tweaks to existing calculations and custom reports.
   • Expense allocation for post-combination expense allocation under FAS 141R (now ASC 805)
   • Tax Accounting with DTA from pre- and post-combination expense
   • Diluted EPS calculations with Tax Benefit proceeds considering pre- and post-combination expense
   • Custom reports or applications for accounting assistance

7. Participant Communications: The importance of clear and effective communications with your participants before, during, and after the merger and the impact it will have on their grants is paramount to morale and retention of key employees. SOS' experts have vast experience in forming and executing communication plans that strike the right chord with employees while avoiding advisory tones.
   • Insider trading policies
     • Who will be impacted going forward
     • How will they be notified
   • Participant Call center staffed with stock plan experts to answer participant questions
     • Treatment to historical stock plan accounts
     • New exercise procedures resulting from transaction
     • How and where they will receive stock detail updates
   • Detailed participant communication plan and execution
     • Develop and or give participant education onsite / via webcasts, recorded or live, all combinations
   • Acquisition Statement Generator: Custom reports with grant status before and after merger that can be printed and mailed or sent electronically.

SOS Across Our Desk: Equity Compensation in the News...

Option Backdating...we bring you at least one every month
Broadcom backdating case ends.

Stuff happens
The NASPP Blog discusses divorce and termination, and then death.

Around the world...
Baker & McKenzie quarterly newsletter summarizing developments around the world that affect global stock plans for the first quarter 2010.

ISS
10 Tips for Navigating the ISS Equity Plan Maze

New group for Crystal users (umm...the software, not the drug)
Are you using Crystal Reports to create custom reports? Looking for a place to learn and network? There's a new Yahoo! group for you.

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SOS Xposé

Top Honors...Emily Van Hoorickx, CEP, CFP®, Senior Vice President at UBS, has been named to Barron's Top 100 Women Financial Advisors List . Congratulations, Emily!"

On the Move...Greg Snyder has moved to Merrill Lynch, and is their new Vice President, Retirement and Philanthropic Services. Good luck, Greg...We are a little late to the party, but wanted to congratulate Tim Davis on his new position, Stock Benefit Consultant ,Wealth Strategy Associate, at UBS. Tim can be reached at tim.davis@ubs.com.

CEP Symposium...The CEPI is currently accepting speaking proposals and sponsorships for the CEP Symposium on December 8. Proposals are due July 9. For more information, please go here.

Scholarship Announcement...The CEPI and OptionEase are proud to announce they are accepting applications for the Marilyn Perkins Scholarship. Applications are due August 16. For more details, please go here.

Elvis has left the building...For the past 4 years, SOS Consultant Apollo Mok has brought expertise, reliability, and his own unique charm to our clients across the country. He has recently been offered a great opportunity to work with CareFusion as their stock plan manager, and has accepted that position. Thank you, and all the best to our good friend Apollo!