Options Granted During Takeover Talks Are Boon for Executives at Fore Systems
By TIMOTHY D. SCHELLHARDT
Staff Reporter of THE WALL STREET JOURNAL
If executives trade shares in their company's stock while secret takeover
talks are under way, they could face insider-trading-law sanctions. But
what if directors grant huge and lucrative stock option awards while such
private discussions are under way?
That's the issue involving the pending $4.5 billion acquisition of Fore
Systems Inc. by Britain's General Electric Co. PLC. In what securities-law
experts call highly unusual actions, directors of the Warrendale, Pa., maker
of Internet-switching equipment granted hundreds of thousands of stock
options to seven top executives while Fore Systems was in talks to be
acquired by GEC, which isn't related to General Electric Co. of the U.S.
The executives stand to reap millions of dollars next month when the
acquisition is expected to be completed, because the stock options, at
prices ranging from $13.44 to $20.56 a share, are well below GEC's
$35-a-share cash offer. Employment agreements signed between GEC
and the seven Fore Systems executives on April 26, the date the
acquisition was announced, permit them to get a cash award representing
the difference in price between their stock options and the $35-a-share
offer price.
Thomas J. Gill, Fore Systems' president and chief executive, qualifies for a
$15.4 million cash award, including $2.8 million gained from his
150,000-share award approved by the board's compensation committee
on April 7, more than a month after the initial overture by GEC to Fore
Systems and Mr. Gill.
Christopher H. Gebhardt, Fore Systems' vice president and corporate
counsel, said the company "doesn't believe it violated any laws" with the
option grants. He added, "I'm not going to make any further comment."
In London, Martin Sixsmith, GEC's chief media spokesman, said the giant
British technology concern "knew about" the issue. "It wasn't a surprise,
and we're not concerned about it," he added. Mr. Sixsmith said it was
GEC's understanding that the option grants reflected the executives'
promotions or anniversary dates with Fore Systems when options often are
granted, but in most cases that issue isn't addressed in Fore Systems'
documents filed the past few years with the SEC.
In addition, the size of the stock-option grants are larger than most grants
awarded previously to Fore Systems executives, SEC documents show.
Securities-law experts say the sizeable awards, made while a company is
privately discussing its takeover, are uncommon and raise some legal
issues. "It's most unusual," said Peter Romeo, a former chief counsel of the
Securities and Exchange Commission, now a partner at Hogan & Hartson,
a Washington law firm.
While Mr. Romeo didn't believe SEC insider-trading rules would apply to
the options, because actual share trading wasn't involved, he said state
fiduciary-duty laws covering corporate boards might apply. An SEC
spokesman said a quick survey of insider-trading case law indicates the
agency hasn't ever brought an action against a company that granted
stock-option awards while private takeover talks were under way.
Stephen Cabot, a Philadelphia attorney with Harvey, Pennington, Herling
& Renneisen Ltd., said that under Pennsylvania's fiduciary-duty laws, "it
would step over the line" if it could be shown that the option awards
harmed the corporation or shareholders. He termed the issue "one of the
most unusual things I've heard of."
Documents filed with the SEC disclose that in January 1999 the Fore
Systems board met with Goldman Sachs Group Inc. representatives to
discuss in general terms "the possible exploration by the company of
strategic alternatives that might include the sale of the company."
According to the documents, Mr. Gill was approached by GEC
representatives on March 4, a day after executives of another unidentified
telecommunications concern contacted him about a possible "strategic
relationship."
The SEC filings reveal that Fore Systems executives met on March 11 in
London with GEC. During this same period, Goldman Sachs bankers
representing Fore Systems approached several other potential bidders.
Further discussions between Fore Systems and GEC, as well as with other
companies, were held between March 17 and April 22. Ultimately Fore
Systems directors approved GEC's $35-a-share offer over a
higher-valued stock merger with another suitor, which was unidentified.
On March 15, the documents show, the Fore Systems board's
compensation committee ratified stock-option awards -- ranging from
200,000 shares to 300,000 shares and at prices of $13.44 or $14.31 a
share-to four senior vice presidents. They are Robert C. Musslewhite, who
the documents say was actively involved at the time in the GEC talks; J.
Niel Viljoen; Kevin E. Nigh; and Donal M. Byrne. The awards were
effective retroactively to March 1 for Messrs. Musslewhite and Viljoen
and last Nov. 17 for the other two executives.
If the GEC acquisition clears, as expected, the four executives stand to
receive from the option grants cash outlays ranging from $4.1 million to
$6.5 million, the documents indicate.
On April 7, according to the SEC papers, the compensation committee
ratified a 100,000-share option grant, at $20.563 a share, to Bruce E.
Haney, senior vice president and chief financial officer, and a 50,000-share
grant, at the same price, to Dr. Robert D. Sansom, another senior vice
president; both were effective retroactive to April 1. Also on April 7,
directors approved Mr. Gill's 150,000-share award, at $16.50 a share,
with an effective date of Feb. 8, which is the "applicable annual review
date with respect to the compensation of Mr. Gill," the documents say.
SEC documents indicate that before this most recent batch of hefty
awards, the seven Fore Systems executives generally received smaller
option grants. Mr. Nigh, for instance, had gotten six option grants, ranging
in size from 15,000 to 50,000 shares, before his recent 200,000-share
award. Of CEO Gill's seven previous option grants, five were smaller and
two were larger than the 150,000-share grant approved in April.
With the anticipated GEC acquisition, Fore Systems' executives are also
benefiting from another board decision of last Oct. 13. At the time, the
company's stock price was significantly below the exercise price of most
employee stock options. Directors approved repricing the so-called
underwater shares to $10 a share for nonmanagement employees and to
$12.50 a share for members of management.
Directors cited a concern that the company wouldn't be able to retain key
employees unless options were repriced. They also noted that two
competitors had also taken such a step recently. Shareholders, however,
often counter that repricing can reward poor performance and that insiders
ought to suffer along with outsiders when stock prices decline.
The repricing certainly benefits Mr. Gill, for one. With the GEC acquisition,
816,250 of his options covered by the repricing can be exercised at $35 a
share. He stands to gain nearly $3.4 million more than if the options hadn't
been repriced, the documents show.
In London, GEC's spokesman said option repricing "isn't a United
Kingdom practice," and he wouldn't comment on Fore Systems' repricing.
But, noting that Fore Systems' shareholder value has soared to $4.5 billion
in recent years, he said, "It's not a surprise that people should benefit from
building up the business. The people involved are clearly important to Fore
Systems, and they will be to GEC. They're anxious to work for us, and we
are content."
But, if they stay with GEC, the Fore Systems executives shouldn't expect
to see such lucrative options packages. In Britain, the value of stock
options may not amount to more than four times an executive's base pay.
The Lucky Seven?
Fore Systems Inc. directors approved substantial stock-option grants to
the following seven executives as the company held takeover talks with
General Electric Co. PLC., which is acquiring it for $35 a share
Executive
Option
Award
(Number
of shares)
Option
Price
(Per share)
Takeover
Gain
(millions)
President & CEO: Thomas Gill
150,000
$16.50
$2.80
Senior Vice President:
Robert Musslewhite
200,000
14.31
4.10
J. Niel Viljoen
200,000
14.31
4.10
Kevin Nigh
200,000
13.44
4.30
Donal Byrne
300,000
13.44
6.50
Bruce Haney
100,000
20.56
1.40
Dr. Robert Sansom
50,000
20.56
0.70 |
