Jetstream Communications

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      Playing By The Rules Recent Developments
in Corporate Governance and Their Effect On
Equity Compensation Plans   Stephen C.
Ferruolo P. Garth Gartrell Joseph M.
Lesko Tuesday, November 12, 2002  
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Nasdaq--Shareholder Approval of Equity
Compensation Plans

• Current--shareholder approval required for grant
  of equity compensation.
• Primary exceptions
• Inducement grants
• Broad based plan

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Nasdaq

• Proposed rule--shareholder approval required
  "when stock option or purchase plan is to be
  established or materially amended or other
  arrangement pursuant to which options or stock
  may be acquired by officers, directors, employees
  or consultants."

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Nasdaq

• Exceptions
• Warrants or rights issued generally to security
  holders
• Tax qualified plans under IRC Section 401 and 423
  and "parallel nonqualified" plans. Must be
  approved by majority of outside board or comp
  committee

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Nasdaq

• Exceptions (continued)
• Plans relating to acquisition or merger
• Inducement grants. Must be approved by majority
  of outside board or comp committee

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Nasdaq

• Selected observations
• Applies to any plan or arrangement regardless of
  whether or not officer or director participates
  or is eligible
• Applies to "material amendment"

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Nasdaq

• Observations
• Material amendment--good faith application by
  issuer
• Certainly not as strict as material modifications
  for ISO purposes
• Generally refer to old 16b-3

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Nasdaq

• Observations
• Material amendment
• material change to
• Benefits
• Number of shares
• Class of eligible participant
• Not quite as finite as NYSE

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Nasdaq

• Observations
• Material amendment--repricing?
• Most certainly
• Room for good faith interpretation of what
  constitutes repricing (contrast with precise NYSE
  definition)
• Unlike NYSE, plan does not have to explicitly
  permit--but plan must permit

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Nasdaq

• Merger and acquisition
• Grandfathers
• Outstanding grants
• Unused pool
• Previously approved by shareholders
• Grants to new hires
• Not for plans adopted in anticipation
• Counts against 20 limit in determining whether
  deal itself needs shareholder approval

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Nasdaq

• Inducement grants
• Material inducements
• Not previously an employee or director
• Presumably means immediately preceding, but
  probably burden to show previous status was not a
  material factor in the award

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Nasdaq

• Parallel nonqualified deferred compensation plan
• "excess benefit" like

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Nasdaq

• Effective date--not sooner than November 1, 2002
  (expiration of comparable NYSE change comment
  period)
• These are listing standards, not laws
• Nasdaq is approachable about exceptions in cases
  where no abuse
• e.g., when person was officers ten years ago or
  repricing only technically a repricing

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Nasdaq

• What should be done?
• Can you change plan now?
• Should you change plan now
• What would you change plan for?
• Repricing
• Any other material changes in the near future
• Nasdaq underlying tenor

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     Codes of Ethics    
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Codes of Ethics

• Background
• Sarbanes-Oxley Act
• NYSE and Nasdaq Listing Proposals
• SEC Proposals
• Implementation Timeline

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      Board Independence and Certification and
Controls    
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Independence

• Board of Directors
• Compensation Committee
• Audit Committee
• Nominating/Governance Committee
• Implementation Timeline

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Certification and Controls

• Certification of Annual and Quarterly Reports
• Certification by CEO and CFO
• Certification of Additional Matters
• Disclosure Controls and Procedures
• Internal Control Reports

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Contact Info
Stephen C. Ferruolo, Esq.858.450.8430sferruolo_at_h
ewm.com P. Garth Gartrell, Esq.858.450.5700ggart
rell_at_hewm.com Joseph M. Lesko, Esq.858.450.5718j
lesko_at_hewm.com
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