Two of eBay's (EBAY) biggest shareholders will vote against the company's plan to expand its options pool -- assuming that they stick to their guidelines.Both Fidelity and Vanguard have proxy voting guidelines that instruct portfolio managers how to evaluate stock plans offered by companies in their portfolio. eBay's plan violates specific rules within each mutual fund company's proxy guidelines. Neither Fidelity nor Vanguard discloses how it votes on particular proxy issues. A new regulation that will force mutual fund companies to disclose their proxy votes doesn't go into effect until next year. However, in the first half of last year, Vanguard voted against 64% of the stock-based compensation plans proposed by companies it invested in, according to information sent to shareholders. Meanwhile, Fidelity's guidelines are a good indication of how the mutual fund company votes, said company spokesman Vin Loporchio. "We follow our proxy voting guidelines in the overwhelming majority of cases," he said. eBay representatives did not return calls seeking comment on potential opposition to its options proposal. Fidelity and Vanguard, the fourth- and eighth-largest stakeholders in eBay, respectively, would be among the most high-profile -- and largest -- investors to vote against eBay's options proposal. The California Public Employee Retirement System, the nation's largest pension fund, has already said it will
ScrutinyShareholders will get a chance to weigh in on eBay's options plan at the company's annual shareholder meeting June 26. If approved, eBay's proposal would increase by more than 50% the amount of options it could grant under its current options plan. The proposal would authorize the company to issue 14 million more shares, tantamount to more than 4% of the company's outstanding stock, to employees and executives in the form of options.
In its annual report this year, the company essentially restated how much its options cost it in 2000 and 2001. Its estimated loss for those two years, including options costs, was $127 million larger than the company estimated in its annual report filed last year.The company's explanation, according to a published report, was that the difference was due to a "clerical error." Accounting regulators are likely to require all companies to expense stock options beginning next year. Meanwhile, a number of companies, including some in the Internet and technology industries, have begun to either expense stock options voluntarily or curtail their use. In contrast, eBay does not expense options and it hasn't moved to limit its use of them.
Out of BoundsThe company's largesse when it comes to options appears to violate both Fidelity and Vanguard's guidelines. Fidelity's proxy rules, for instance, call for the mutual fund company to withhold its vote on a stock plan proposal when the sum of the stock available under a company's stock plan adds up to more than 10% of outstanding shares. Fidelity does give some leeway for companies with smaller market capitalizations, allowing their stock plan dilution to jump up to 15%. With a market capitalization of more than $32 billion, eBay hardly seems to qualify as a small-cap company. Regardless, its potential dilution tops that cap as well. Likewise, Vanguard's rules instruct its managers to vote against stock plans when the total dilution resulting from those plans reaches more than 15% of outstanding shares. Vanguard guidelines also state that the company opposes stock plans when a company's annual options grants have exceeded 2% of outstanding shares. eBay's average options grant has amounted to about 4.8% of outstanding shares over the last three years, according to the IRRC. eBay's plan appears to violate other guidelines set by Fidelity and Vanguard as well.
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