eBay's Plan Too Big for Some Rulebooks

Fidelity opposes plans that offer options at a discount to the fair market price of a company's stock on the day they are issued. eBay's proposal would allow it to grant options at 85% of the stock's fair market value.

Meanwhile, Vanguard opposes plans that allow for the repricing of underwater options. eBay's proposal would allow the company to reprice options, albeit only with shareholder approval.

The opinions of Fidelity and Vanguard matter because of their large stakes in eBay. As of March 31, Fidelity held 8.88 million shares of eBay, or about 2.8% of outstanding shares, according to LionShares. Vanguard held 5.65 million shares, or 1.8% of eBay's outstanding stock, at the end of the first quarter. The top 15 institutional investors in eBay held about 32% of the company's shares as of March 31, according to LionShares.

Opposition to eBay's plan has been gaining steam in recent weeks. Upstart proxy adviser Glass Lewis lambasted the plan in a recent report, calling it "excessive." Calpers representatives said the pension fund relied on Glass Lewis' research in reaching their decision to vote against the plan.

But opponents of eBay's proposal face an uphill battle. The company's co-founders, Pierre Omidyar and Jeff Skoll, hold about 30% of the company's outstanding shares. Other eBay directors and officers hold more than 3% more of the company's shares.

Meanwhile, Institutional Shareholder Services, the nation's leading proxy adviser, has come out in favor of eBay's options proposal. Despite the dilution caused by eBay's various stock plans, ISS determined that the cost of eBay's proposal falls below its cap.

ISS's stamp of approval could give cover to institutional investors who choose to vote in favor of the options proposal.

The Top 15

None of the top 15 institutional owners disclosed whether they are voting for or against eBay's option plan. Nine declined to disclose how they vote on proxy issues or the guidelines that they use. Among those holders were Capital Research & Management, Janus Capital Management, Alliance Capital Management and Barclays Global Investors, which, respectively, have the first-, second-, third- and fifth-largest stakes in eBay.

Because eBay is a member of the Nasdaq 100, the stock market's Financial Products Services group holds eBay shares on behalf of investors in its index fund. According to its bylaws, Nasdaq, eBay's eighth-largest institutional owner, votes its shares proportionally with other shareholders, company spokesman John Jacobs said. So, if other shareholders vote down a proposal by a 2-to-1 margin, Nasdaq will vote its shares in the ratio, Jacobs said.

Representatives of American Express Financial Advisors and Amerindo Investment Advisors, the 13th- and 14th-largest institutional holders of eBay, were not available for comment on how they plan to vote their shares. A spokesperson for Peregrine Capital Management, which holds the 12th-largest stake in eBay, declined to comment.

A regulation recently adopted by the Securities and Exchange Commission will force mutual fund companies to disclose their proxy votes once a year beginning in August 2004.

eBay shares closed down 92 cents, or 0.9%, on Thursday to $101.90. The company's shares are up more than 50% since the beginning of the year.

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