Rev. Rul. 71-474

Corporation X granted its employees stock options that met the requirements of section 422(b) of the Internal Revenue Code of 1954 defining qualified stock options. In a subsequent year corporation X was merged into corporation Y in a transaction to which section 425(a) of the Code applied. Under the provisions of the merger agreement, corporation Y was not required to secure its shareholders' approval of the plan of merger. The merger agreement provided that, as of the effective date of the merger, each share of X stock would be converted into one share of Y stock. Also, under the merger agreement, Y corporation assumed each qualified stock option previously granted by X corporation, thereby entitling the optionees upon exercise of their options to purchase stock in corporation Y at the one for one stock conversion ratio of the merger.

Section 425(a) of the Code provides, in part, that the term "issuing or assuming a stock option in a transaction to which section 425(a) applies" means a substitution of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation.

With respect to the grant of a qualified stock option, section 422(b)(1) of the Code provides that it must be granted under a plan that has been approved by the shareholders of the granting corporation within 12 months before or after its adoption.

Held, the assumption of the stock options by corporation Y did not require the approval of its shareholders in order to preserve the status of those options as qualified stock options under section 422 of the Code inasmuch as the provisions of section 422(b)(1) of the Code applied only at the time the options were granted.