The treatment of equity compensation in a change-in-control is complicated and perhaps the most complicated of all is the spin-off. We recently posted an article by Michael Gorski of Semler Brossy that looks at various ways outstanding stock grants are handled in a spinoff (“Keeping Your Equity Strategy in Balance Through a Corporate Spin‐Off,” originally published in workspan).
Gorski explains that, to minimize concerns over employee relations, companies should seek an outcome in which the pre-spin equity value is preserved. He breaks the approaches into various types, including the following two most common methods:
- Shareholder (or Portfolio) Approach: Equity holdings are treated the same as those of a company shareholder in that they are divided into equity in both the remaining company and the spun-off entity on a one-for-one basis. For options, the exercise prices are converted, but the number of options remains the same.
- Employee (or Concentration) Approach: Equity holdings are entirely in either the remaining company or the spun-off entity. This is the approach used most often as it ensures employees are aligned directly with the success of the company they are working for post-spin. For options, both the number of options and the exercise prices are translated to maintain the existing value.
Gorski provides a few examples from high-profile deals. For instance, when PayPal was spun off from eBay, it used the “employee approach” for employees staying with eBay or shifting to PayPal, but for executives in charge of a smooth transition, it used the “shareholder approach.”
When Kraft Foods spun off from Mondelez International, Gorksi notes that the transaction used the “shareholder approach” for options, SARs, restricted stock, and deferred stock units to encourage a collaborative environment between the companies. However, for performance shares, it used an “employee approach” to align directly with each company’s post-spin goals.