| Research Abstract |
The writer of this research argues that, contrary to majority opinion, under the new system of stock options, directors and employees of subsidiaries are not to be vested with stock options of the parent company. The reasons are as follows :
(1) Although the former system limited stock options to directors and employees, the new stock option system replaces this explicit language with "anyone who is not a stockholder." Deletion of the limiting provision was accomplished by strong requests from the economic sphere. The action came to be interpreted in a way that makes it possible to grant stock options to anyone, at the company's discretion. I have concerns about whether such an interpretation is appropriate.
(2) Under another new law, the definition of remuneration of directors has been improved to take account of the actual circumstances. According to majority opinion, however, the rules on stock options are provided under an independent system. Under that way of thinking, such rules do
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not affect calculation of remuneration.
The former stock option system provided for different rules for company self-owned shares and pre-emptive rights. The current revision organizes and integrates these matters and clarifies the purpose and content of stock options. Stock options are an incentive remuneration that aims to increase the stock price of an issuing company. Because of this purpose, vesting stock options in those who are unrelated to increase in the stock price is not allowed. The scope of those who could be vested with stock options has become seemingly unlimited, but consideration of the institutional framework leads to the conclusion that some limits do, in fact, exist.
(3) The revision of commercial law extends to making a change in definitional provisions concerning parent-subsidiary corporations. The change is from a formal standard to a substantial requirement, which is acquisition of a majority of total voting rights. This revision can be evaluated as epoch-making since it reflects real circumstances more than before. There is, however, no change in the status of parent and subsidiary corporations as legally independent. Each has its own organization and makes its own decisions. (It is possible to consider exceptional circumstances when the parent owns 100% of the subsidiary's stock.)
Apart from wholly-owned subsidiaries, however, if the parent company issues options of its own stock to directors of a subsidiary, the issuing body is completely different than the actual company to which the director is responsible. It is said that stock options, which aim to contribute to the increase of stock price, target the stock of each independent corporation. Thus, the limitation of those to be vested with stock options is justified from the perspective of legal independence of parent and subsidiary corporations.
(4) Moreover, a director at a combined corporation has a duty of loyalty and duty of care as an honest manager towards the company to which he belongs. For instance, when a director of a subsidiary corporation acquires stock issued by a parent corporation for the purpose of stock option, it is usual that parent corporation vests it expecting performance that makes for an increase in stock value. Satisfying such expectations may mean that the director violates his general duty to the subsidiary. Therefore, in theory, a parent corporation's providing stock options in a director of a subsidiary corporation encourages the illegal act of neglect of duty. It is obvious that the legal system could not have had such a purpose.
(5) In many cases, directors are in charge of various positions at combined corporation. In such cases, it is necessary to have an approval on conflicts of interests at mutual companies. Vesting stock options is allowed exceptionally only if there is such approval. For approval of a resolution of vesting stock option at the general meeting directors have a duty to disclose the reasons for vesting but my opinion is that in such a case they have to explain the reasons in order to obtain approval over conflict of interests.
(6) Merger is said to be the strongest combination of corporations, and comprehensive transfer of property is a legally important effect. Then, in case of stock options under the new system what kind of treatment will be involved with the advantageous issue of new stock reservations? The legal consequence of merger is that the succeeding company succeeds to all the rights and duties of the dissolving company. The new stock reservation right is one kind of obligation, so succeeding companies succeed to duties on new stock reservation rights too. The new stock reservation right holders are protected through filing a petition for creditors' objections when the estimate is extremely low. Less
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