Rev. Rul. 65-162

The purpose of this Revenue Ruling is to provide interm standards relating to shareholder approval of qualified stock option plans, employee stock purchase plans and certain restricted stock option plans.

Proposed Income Tax Regulations relating to qualified stock option plans, employee stock purchase plans and restricted stock option plans were published in the Federal Register dated December 19, 1954. However, many options were granted pursuant to plans adopted and approved before the requirements contained in the proposed regulations were made public.

In order to avoid hardship to recipients of options granted pursuant to plans adopted and approved before the requirements contained in the proposed regulations were made public, and in order to give corporations an adequate opportunity to conform their plans to the requirements of the proposed regulations, certain provisions of the proposed regulations relating to stockholder approval of such plans will not be applied until 15 months after the date of publication of final regulations in the Federal Register. Until 15 months after the publication of final regulations, situations which would otherwise be governed by those provisions will be governed by the interim standards set forth in this ruling. However, nothing contained in these interim standards should be interpreted to indicate whether the approval requirements set forth in the proposed regulations will be retained or modified in the final regulations.

The provisions of the proposed regulations that will be affected by this ruling and the interim standards applicable thereto are set forth below:

1. Proposed regulation provisions .-Sections 1.422-2(b)(1) and 1.423-2(c)(1) of the proposed regulations, relating to qualified stock option plans and employee stock purchase plans respectively, require that stockholder approval of a plan be in the manner provided by the corporate bylaws, or in the manner provided by the laws of the State of incorporation, which relate to stockholder approval of an increase in the authorized shares of the class of shares to be issued under options granted under the plans.

Interim standard .-A plan adopted and approved on or before 15 months after the publication of the final regulations in the Federal Register will be considered to have the requisite stockholder approval if it is approved by the stockholders holding a majority of the voting stock of the corporation voting at a duly held stockholders meeting occurring within 12 months before or after the adoption of the plan, unless the corporate charter or bylaws or the law of the State of incorporation contains specific provisions with respect to stock option plans which require that a greater percentage of the stockholders approve the plan.

2. Proposed regulation provision .-Section 1.424-2(d)(3)(i) of the proposed regulations requires that, as to options described in section 424(c)(3)(B) of the Internal Revenue Code of 1954 and granted after December 19, 1964, the adoption and approval required of a restricted stock option plan is the same as that required of an employee stock purchase plan under section 423(b)(2) of the Code, except as to the time of approval. Thus, such approval must be expressed in the manner provided in section 1.423-2(c)(1) of the proposed regulations.

Interim standard .-Where such restricted stock options are granted after December 31, 1963, and before 15 months after the publication in the Federal Register of the final regulations under section 424 of the Code, the adoption and approval requirements set forth in section 424(c)(3)(B) of the Code will be deemed to have been met if the plan was adopted and approved on or before December 31, 1963, in the manner required by the applicable law of the State of incorporation. Thus, such an option granted pursuant to a restricted stock option plan which was not approved by the stockholders of the grantor corporation, but which was adopted by an authorized executive committee and approved by the board of directors of the grantor corporation before January 1, 1964, will meet the requirements of section 424(c)(3)(B) of the Code, relating to approval, provided that the granting of options pursuant to such a plan is not contrary to the applicable State law.

3. Proposed regulation provision .-Section 1.423-2(c)(3) and (4) of the proposed regulations provides that the employee stock purchase plan, as adopted and approved, must indicate the corporations whose employees will be offered options under such plan. It further provides that any change in the designation of corporations whose employees will be offered options under the plan will be treated as the adoption of a new plan irrespective of whether, at the time the plan was first approved, the board of directors or an option committee of the grantor corporation was authorized to designate, from time to time, which corporation of the group of corporations consisting of the grantor corporation and its parent or subsidiary corporations could participate under the plan.

Interim standard .-Employee stock purchase plans adopted and approved before 15 months after the date of publication in the Federal Register of the final regulations under section 423 of the Code will be considered to have met the requirements of section 423(b)(1) of the Code where the description of corporations whose employees may receive stock options is in terms which include only the corporations in the related group described in that section. That group includes parent and subsidiary corporations which become such after the adoption of the plan. Thus, a plan which otherwise qualifies will be valid if, by its terms, the directors or an option committee of the grantor are authorized to designate, from time to time, the corporations within the related group that are to participate in the plan. Similarly, a plan which otherwise qualifies will be valid where, by its terms, corporations within the related group are empowered to participate or to withdraw their participation under the plan at their election.

Accordingly, changes in the designation of corporations whose employees are to receive options, where made pursuant to such terms, shall not constitute the adoption of a new plan if done before 15 months after the publication in the Federal Register of the final regulations under section 423 of the Code. This interim standard also applies to restricted stock option plans described in section 424(c)(3)(B) of the Code.

¹ Based on Technical Information Release 705, dated Mar. 10, 1965.