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Custom-Fit Counsel

A long time ago, when I was a young associate in New York, a partner remarked that a good inside counsel needed only two things: a desk phone and the directory for Cravath, Swaine & Moore.

Since then, the technological references have become dated, and the professional alternatives have expanded. As a result, these days any in-house counsel armed with little more than a smart phone ought to be able to obtain optimal advice for any combination of lead time, price point and venue.

Except that's not enough either. If the option backdating tempest taught us anything, it's that the standard isn't, "What's the best answer you can find?" but instead, "What's the best answer for this company?"

I thought of that when earlier this year (in one of the only great newspapers I know of that is printed on pink stock) I saw a parade of notables criticizing a Silicon Valley company for repricing employee stock options. "It's unfair," they cried, "for a company's employees to reprice when the company's shareholders can't."

Among the critics was a prominent GC with big firepower. If it's him vs. me in the boardroom, most directors will pick him. Actually, given the psychological and sociological phenomenon involved in board and small peer group decision-making generally, they're probably taking his counsel every time. I probably would too.

Except he was wrong. Or, more correctly, the critics were making at least one fundamental assumption that was incorrect, as is often the case with conventional wisdom.

Here's why: In the case of option repricing, they assume stockholders are locked into stock prices just like employees. Except they're not. Stockholders can get in and out of their positions 24/7--and in split-second intervals therein. And that's before factoring in derivatives trades or naked short-selling.

In contrast, employees can only "reprice" in one way and at one time: by voting, with their feet, to work elsewhere. That tends to be a single trade made after much deliberation. One that is almost never unwound once announced. It's a path that tends to be trod by the better employees first. Accordingly, it's a problem you want to fix before you have it.

(Or, as another wise person once told me, "Never solve a problem you can avoid.")

Last month, another notable Silicon Valley company elected to reprice its employees' options as well. This came as a "surprise" to many; the company was known as a stalwart of shareholder rights and values. Had the company forsaken those values? Unlikely. Instead, management probably determined (in part on the advice of counsel) that in order to live up to their commitments to stockholders and otherwise, they needed to take action, which might subject the company to criticism and abuse, including from subsets of groups they were ultimately trying to benefit.

"Should" is a decider's term, a moral term. That's an area from which lawyers often--and often should--shy away.

But there's a balance to be struck. As in-house counsel, you can use your phone and browser to find advice on how to do things such as reprice employee options. You can even get advice about who's likely to complain, and what the consequences will be. But it can be hard to get (and it can be against any lawyer's nature to give) advice on whether your company should do something, such as repricing employee options. And while the decision itself probably isn't your call, as an inside counsel your obligations as a manager and a fiduciary may make giving that kind of advice part of your job.

Even if that advice is at odds with that of a great GC.

Self-preservation note to draft: In fairness, I suspect much of his advice, as is the case with most edited content, got left on the cutting room floor.

Martin Collins

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