Options Trading Tutorial

If a company reabsorbs a spin-off, what happens to employee stock options?

I work for a spin-off of a larger company and received a number of options in the subsidiary when I was hired. Now it looks as though the parent company may reabsorb the subsidiary because they have lower visibility and want to regain industry traction. What happens to my options? Will they be converted to stock in the parent company? Paid out? What is the overall implication to the company if they have to reabsorb a subsidiary with 500+ employees? Thanks! I should probably state that I am vested with the company, which is US-based.

Public Comments

1. Review the following web pages to see if they answer some of your questions. Perhaps you are not alone. The governing securities and exchange commissions must be able to answer the questions of your particular case. They may have a FAQ bulletin board also. http://www.sebi.gov.in/acts/stockoption.pdf http://www.koskieminsky.com/publications/esop_news/key_legal_issues.pdf
2. It will depend on the agreement that is executed between the spin off entity and the original parent. In many ways, now that the spin off has occurred, an absorption is just like an acquisition. Typically your options will be converted into the right to receive the parent company's options at the same exchange rate that the holders of spin-off stock are receiving parent stock, but if your options are not converted, typically you would be cashed out. Companies rarely like to cash out people though of their options if they plan on retaining you (plus it makes the transaction more expensive day one -- assuming that the corporation does not have to authorize additional shares under its option plan it probably doesn't even materially impact EPS to roll over the options). In terms of the overall implications, again the best way to think of it is as an acquisition -- so typically overhead and G&A functions that are duplicative might be terminated but non-duplicated functions will remain intact. If you are in an area with significant overlap, typically they'll phase you out with a severance package.