Time Warner is breaking up with Time Inc, spinning off its magazine properties into a new company next month, but its sending some employees away rather harshly, at least when it comes to stock options.
In a recent memo obtained by The Wire, Time Warner told employees of Time Inc. that all "unvested stock options will be forfeited as of June 6, 2014." They are also issuing a blackout period for vested stocks, and adjustments for restricted stock units (RSUs.)
On June 6th, Time Warner will spin off Time Inc into a separate, also public company. Any Time Inc. employee who received any portion of their compensation in unvested shares will be affected. While we do not know exactly how many employees this will affect at Time Inc, it is likely all mid-level to senior-level executives who have non-vested stocks.
Vested Stock Options
Vested stock options are a claim on future assets, an incentive for employees to stay at their company, if you will. Though they factor into compensation, they cannot be cashed out upon receipt. There is a set period of time (generally two years, though it can be as long as six years), during which the stock options cannot be converted to cash. If the employee leaves within that time, or is fired, the options disappear. Or, in this case, if the company for which you work spins off into its own entity from a larger holding company, they can disappear.
Time Warner notes that their shareholders "will receive a dividend of 1 share of Time Inc. stock for every 8 shares of Time Warner stock they hold" on May 23 at 5 p.m. That is, of course, if you are already vested. If you work for Time Inc, you will receive a fraction of your Time Warner holdings back. The two week delay (May 23 to June 6) will be for share conversion, with trading commencing on June 6 on the New York Stock Exchange. The actual value of the converted stock awarded to Time employees will be determined when the TIME price is set on the 6th. We can estimate that TIME will trade not very high, considering how the publishing industry is going. TWX opened today at $68.71.
Time Warner also issued a "blackout period" for vested stocks, from May 21 to June 13. During the blackout, employees can review "equity plan balances in [their] account at Fidelity, but [they] will not be able to exercise any stock options and shares from vesting of RSUs will not be distributed." Any employee with vested stocks expiring during the blackout must "exercise their options" (sell, sell, sell) before May 21st. Otherwise, the shares are forfeited.
As for Time Inc. employees with vested options expiring after the blackout, they will also be affected by the spin off. Time Warner told employees "vested stock options can be exercised for a limited period of time." Employees will have "until the earlier of (i) your original grant expiration date or (ii) one year from the spin-off date." This means vested options will expire, at latest, on June 6th, 2015.
Restricted Stock Units
The RSUs, or restricted stock units, are stock options received in accordance with a vesting plan and distribution schedule. The schedule is generally determined by career milestones, such as being with the company for five years or completing a major project. Upon vesting, the RSUs are considered income (a portion of the vested shares are used to pay income tax.) The remaining shares can be cashed out.
The internal memo states that because "restricted stock unit (RSU) awards are not actual shares of stock, participants who hold stock options or RSUs will not receive this dividend of Time Inc. stock. Instead, the Company will adjust your outstanding equity grants to reflect the change in the value of the Company due to the Time Inc. spin-off and to generally maintain the value of your awards."
During the blackout, RSUs will be inaccessible. So say an employee's five year anniversary with Time Inc is May 22nd. Their shares will distribute "on or about June 16," and be subject to the adjustment in company value after the spin off is complete. Again, this is a hit to loyal employees, as TIME stock will likely be trading lower than the current TWX stock.
An unspecified portion of unvested RSUs will vest on a pro-rated basis on June 6, and the remaining units will be cancelled.
A finance professional familiar with the situation told The Wire that the "right" thing for Time Warner to do in this case would have been to convert Time Inc. shares, and keep them vested rather than letting them disappear, in order to honor their commitments to employees. Instead, Time Warner is cutting ties with their soon-to-be-former employees in a far from friendly way.