Rev. Rul. 80-29

1980-1 C.B. 93, 1980-5 I.R.B. 5.

                       Internal Revenue Service
                                 Revenue Ruling

    EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS; STOCKHOLDERS' APPROVAL

                          Published: February 4, 1980

Section 442.--Qualified Stock Options, 26 CFR 1.422-2: Qualified stock options defined.

(Also Section 423; 1.423-2.)

  Employee stock options and stock purchase plans; stockholders' approval. A corporation's qualified stock option plan and employee stock purchase plan may be approved, for purposes of sections 422(b)(1) and 423(b)(2) of the Code, without a stockholders' meeting if, in accordance with state law, unanimous written consent of the stockholders is obtained. However, a stockholders' meeting is required if there is less than unanimous written consent.

ISSUE

  Is a stockholders' meeting required by section 422(b)(1) or 423(b)(2) of the Internal Revenue Code when, in accordance with state law, a corporation's qualified stock option plan or employee stock benefit plan is approved by either the unanimous written consent or, where allowable, by the majority written consent of the stockholders of the corporation?

FACTS

  Corporation A obtained approval of a qualified stock option plan and an employee stock purchase plan by obtaining the unanimous written consent of all its stockholders within 12 months after the date the plans were adopted. The law of A's state of incorporation allows such unanimous written consent in lieu of a meeting of the stockholders.

  Corporation B obtained approval of a qualified stock option plan and an employee stock purchase plan by obtaining the written consent of a majority of its stockholders within 12 months after the date the plans were adopted.  The law of B's state of incorporation allows majority written consent in lieu of a meeting of the stockholders.

LAW AND ANALYSIS

  Section 422(b)(1) of the Code provides that a stock option plan must be approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted in order for options granted under the plan to be qualified stock options.

  Section 1.422-2(b)(1) of the Income Tax Regulations requires that stockholder approval of a qualified stock option plan must comply with all applicable provisions of the corporate charter and bylaws and the law of the state of incorporation, and must represent the express consent of stockholders holding at least a majority of the voting stock of the corporation voting in person or by proxy at a duly held stockholders' meeting.

  Section 423(b)(2) of the Code provides that employee stock purchase plans must be approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted.

  Section 1.423-2(c)(1) of the regulations requires that the approval of the stockholders must comply with all applicable provisions of the corporate charter and bylaws and the law of the state of incorporation, and must represent the express consent of stockholders holding at least a majority of the voting stock of the corporation voting in person or by proxy at a duly held stockholders' meeting.

  The above regulations set forth procedures for obtaining stockholder approval to give stockholders as a group control over the issuance of stock options and thereby enable them to protect their equity interests.  Sections 1.422-2(b)(1) and 1.423-2(c)(1) of the regulations require that the procedures for obtaining the approval of stockholders afford them a measure of control over the issuance of stock options that is at least equivalent to the control that exists when the holders of a majority of the outstanding voting stock of a corporation consent at a duly held stockholders' meeting. This is done by providing that stockholder approval must represent the consent of stockholders holding at least a majority of voting stock of the corporation voting in person or by proxy at a duly held stockholders' meeting.  When, in accordance with state law, the approval of stockholders is obtained by written consent in lieu of a stockholders' meeting, and when that consent is unanimous, the stockholders are afforded the same protection and control over the issuance of stock options that exists when they are given notice of, and have the opportunity to attend, a stockholders' meeting.  See also Rev. Rul. 75-256, 1975-2 C.B. 194, which concludes that section 1.422-2(b)(1) requires the express consent of stockholders who hold at least a majority of the outstanding voting stock of a corporation and vote in person or by proxy at a duly held stockholders' meeting.

  Various jurisdictions permit less than unanimous written consent in lieu of a meeting of stockholders.  A stockholders' meeting provides dissenting stockholders an opportunity to present their views to the other stockholders. Unanimous written consent is a satisfactory alternative to a stockholders' meeting since there are no dissenting stockholders who need to present their views. However, where a corporation allows written consent by a majority of the stockholders, dissenting stockholders are denied the opportunity to convince the other stockholders of their dissenting views at a stockholders' meeting. Thus, the stockholders are not provided the measure of protection required by sections 1.422-2(b)(1) and 1.423-2(c) of the regulations.

HOLDING

  A stockholders' meeting is not required by section 422(b)(1) or 423(b)(2) of the Code when, in accordance with state law, a corporation's qualified stock option plan or employee stock benefit plan is approved by unanimous written consent of the stockholders of the corporation.  However, a stockholders' meeting is required if there is less than unanimous written consent by the stockholders.

Rev. Rul. 80-29, 1980-1 C.B. 93, 1980-5 I.R.B. 5.