The New Yorker magazine, not my usual source of prompts for blog posts on corporate and securities law, posted a piece on the recent hiccup with stock option exercises by the newly public media company BuzzFeed. BuzzFeed went public by merging with a SPAC. Longtime employees that were hoping to cash in on their stock options were unable to do so right after the merger, at which point the company’s stock price sharply declined, making the options less valuable. The employees are aggrieved at the missed opportunity to exercise options and sell shares at the higher price.
Continental Stock Transfer & Trust Company is featured prominently in the piece. Continental is BuzzFeed’s transfer agent, a category of service provider unknown to most people outside the corporate finance world. As the back-office company responsible for keeping track of who owns which of BuzzFeed’s shares, Continental’s job, among others, is to process the exercise of BuzzFeed’s options and issuance of shares to the employees. (I’ve worked with Continental for years with my public company clients but have no personal connection to the BuzzFeed controversy.)
The article places some focus on the fact that BuzzFeed went public via SPAC merger, rather than a traditional IPO, implying that something about the SPAC structure led to a rushed process and contributed to the option exercise brouhaha. While there are legitimate concerns about the SPAC structure generally, I think in this case it’s a red herring. The BuzzFeed merger was announced in June 2021 and closed in December. That allows plenty of time for the company and its various advisors to get a handle on the outstanding stock options and ensure that everything would go smoothly upon closing, just as a traditional IPO involves months of planning.
The source of the delay with the employee options is that they were exercisable into Class B stock, but it’s only Class A stock that trades publicly. Therefore, the shares needed to be converted, and the conversion process has taken a few days to process at Continental.
By its nature, Continental follows instructions given to it by the issuer (BuzzFeed in this case), which in turn is advised by its counsel and investment bank. Continental does not oversee the process. One can quibble with the exact turnaround time that Continental is taking to process the conversions, whether there are better methods than the email printout signature described in the article, etc., but it’s the job of the company and its advisors to anticipate what happens when one goes public, which includes knowing that transfer agents don’t process stock conversions instantaneously. BuzzFeed’s attempt to deflect blame to Continental (saying to the employees that “only yesterday” did we learn about the additional steps required to convert from Class B to Class A) is telling. The company should have had a handle on what needed to happen and how long it was expected to take long before “yesterday.”