TECHNOLOGY MEDIA & TELECOMS
13 November 2000
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Fat cats or skinny kittens? Freeserve employees probably feel like neither at the moment. The management is currently considering recalculating employee share options because their value has plummeted. And if, like Freeserve, you don't have any assets, the retention of good staff - and preventing them going to rivals - is critical. Golden handcuffs have always been particularly suited to technology, media and telecommunications (TMT) companies, which are able to offer the possibility of fantastic returns for helping to make the company a success.
So internet service provider (ISP) Freeserve's need to reassess stock options is something of a shock to the status quo, particularly when you look at its history. Set up in August 1999 by Dixons, it set the standard in that it was one of the first dotcoms to successfully float. Its UK advisers were Linklaters & Alliance, Herbert Smith and a raft of investment banks, including Credit Suisse First Boston and Dresdner Kleinwort Benson. The prospectus had 11 pages of warnings, more than any other in the history of UK stock, but when you get a market capitalisation of £1.5bn in return, who cares?
But that was then. Investors' love affair with technology has since cooled. While some dotcoms, such as Parthus and Bookham Technology, continue to thrive, many - particularly those with the dreaded word "consumer" in their remit - have fared less well. That is not to say Freeserve is a failure, but plummeting stock is no longer just the fear of investors, it is also something that affects employees. Freeserve staff have seen their stock options drop from 912p in February to the current price of 155p (they were issued at 150p and have an exercise price of 350p). Hence the decision to look into recalculating.
Share options came into being in 1984 with the introduction of Inland Revenue-approved executive share options. They grew in popularity until 1995, when the government abolished many of the associated tax breaks, but by then they were part and parcel of any deal. They also have a historical association with TMT companies. After all, who has not thought enviously of those bearded code writers in Silicon Valley who agreed, with the business acumen of those with higher standards of personal hygiene, to go and work for Mr Gates, and saw the value of their options grow? And grow. And grow.
And then... stop growing. Microsoft is one of a handful of US companies, including Amazon and Sprint, that have recently adjusted employee stock options by lowering performance targets, in recognition of the Department of Justice, poor profits and a general slide in stock. It is no accident that these are all US companies, because this is a very US concept. Here in the UK, recalculating is just not done. Shareholders, particularly institutional ones, take the view that if they cannot fiddle about with their shares, why should anyone else be able to? Plus a volatile market, or even a burst bubble, is not a good enough reason. As the adverts remind us, stocks go down as well as up.
The challenge for UK employee share scheme lawyers is to watch the market like a hawk. Few are overly concerned about Freeserve's decision, believing shareholders will stop it becoming a trend. But what lawyers have to do now is look at other ways of creating a tasty remuneration package - with benefits not dependent on stock vagaries - in a tight recruitment market.
There is also an argument that Freeserve's actions could affect clauses on lapsed options on the full-time salary limit. This is often included to try and stop people going the Freeserve route, but if the US way becomes more acceptable, this would be something lawyers would need to look at.
So whatever Freeserve decides to do (or investors with TMT stock), good employee share scheme lawyers are going to find themselves in demand. But even having the best team on your side when the options are drawn up cannot protect you from market forces. After all, let us not forget just who is far and away the market leader in employee share schemes - Linklaters. And who was it again who advised Freeserve on its IPO?
Abigail Townsend, senior reporter firstname.lastname@example.org