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Cypress' Options Largess Extends to Subsidiaries

Cypress Semiconductor (CY), a supplier of integrated circuits mostly for the communications industry, is using an esoteric system of equity compensation at several subsidiaries that experts say obscures expenses and could create conflicts of interest.

The system, first articulated in a 1992 book by T.J. Rodgers, Cypress' outspoken CEO, sets aside minority ownership stakes in subsidiaries for employees -- as well as Cypress executives who sit on their boards. The stakes are awarded without a shareholder vote.

Employees and directors of the new Cypress units receive ownership interests via securities that the company labels as either options or shares, although no public market exists for either. Instead, these stakes become valuable when, after time, the parent repurchases the stake or sells them to the public in an IPO. Until then, the cost of the compensation program isn't known or disclosed.

"Our concerns with these plans include the fact they lie outside the scope of the company's corporate options plan, thereby making their true cost difficult to measure," wrote proxy adviser Glass Lewis in a report about Cypress Semiconductor earlier this year. Glass Lewis said the plans are "a risk-free call option on Cypress' future growth opportunities provided to insiders at the expense of shareholders."

The subsidiary stock plans have drawn increased scrutiny amid growing concern about Cypress' heavy use of options in general. In June, Cypress quietly increased the number of shares available under one of its corporate options plans by 20 million, equal to about 16% of its outstanding stock. The move came days before the company would have been required to take a shareholder vote on the increase, but Cypress didn't disclose it to shareholders until more than six weeks after the fact.

Cypress has two types of subsidiaries. It has launched several start-ups in which it aims to buy back the employee stakes, and has made several acquisitions, which Cypress may choose to take public.

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