SEC Division of Corporation Finance no-action letter: Martha Stewart Living Omnimedia, Inc.

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Securities Act of 1934 Rules 13e-4 and 14e-1

November 7, , 2003

Response of the Office of Mergers and Acquisitions Division of Corporation Finance

Warren S. de Wied, Esq. Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, NY 10004-1980

Re: Martha Stewart Living Omnimedia, Inc. File No. 5-57891

Dear Mr. de Wied:

In regard to your letter dated October 31, 2003, our response is attached to the enclosed copy of your correspondence. By doing this, we avoid having to recite or summarize the facts set forth in your letter. Each defined term in this letter has the same meaning as defined in your letter, unless otherwise noted.

Martha Stewart Living Omnimedia, Inc. has commenced an offer to certain holders of outstanding options that have an exercise price in excess of $8.00 per share. As described in more detail in your letter, MSO will make a single cash payment as consideration to tendering option holders on the first payroll date in July 2004, so long as such employee remains continuously employed through June 30, 2004. MSO is conducting the program for compensatory purposes. The staff of the Division of Corporation Finance will not recommend that the Commission take enforcement action under Rules 13e-4(f)(5) and 14e-1(c) if MSO makes payment for the options tendered in the offer as described in your letter.

Without necessarily concurring with your analyses and based solely on your representations and the facts presented in your letter, the no-action position expressed above is limited to the application of the rules to this offer. The offer should be discontinued, pending presentation of the facts for our consideration, in the event that any material change occurs with respect to any of those facts or representations. In addition, we direct your attention to the anti-fraud and anti-manipulation provisions of the federal securities laws, including Sections 10(b) and 14(e) of the Exchange Act and Rule 10b-5

thereunder. The Division expresses no view with respect to any other questions that this offer may raise, including, but not limited to, the adequacy of disclosure concerning, and the applicability of any other federal or state laws to, the offer.

Sincerely,

Pamela W. Carmody Special Counsel Office of Mergers & Acquisitions Division of Corporation Finance

Incoming Letter:

October 31, 2003

Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, NY 10004-1980

Re: Martha Stewart Living Omnimedia, Inc. Issuer Tender Offer on Schedule TO Filed September 25, 2003, as amended SEC File No. 5-57891

Office of Mergers and Acquisitions Securities and Exchange Commission Division of Corporation Finance 450 Fifth Street, N.W., Mail Stop 0308 Washington, D.C. 20549 Attention: Abby Adams, Esq., Attorney Advisor

Re: Martha Stewart Living Omnimedia, Inc. Issuer Tender Offer on Schedule TO Filed September 25, 2003, as amended SEC File No. 5-57891

Ladies and Gentlemen:

Martha Stewart Living Omnimedia, Inc., a Delaware corporation (the "Company" or "MSO"), has commenced an exchange offer (the "Offer"), pursuant to which the Company is offering certain eligible employees the opportunity to exchange certain options outstanding under the Company's Amended and Restated 1999 Stock Incentive Plan (the "Plan") for the right to receive, at a future date, a special cash bonus payment. The Offer is being conducted for compensatory purposes and has been structured in reliance upon the Division of Corporation Finance's Exemptive Order dated March 21, 2001 (the "Exemptive Order"), which provides relief from the requirements of Rule 13e-4(f)(8) (the all holders and best price rules) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Offer is more fully described in a Schedule TO filed with the Securities and Exchange Commission (the "Commission") on September 25, 2003, as amended. On behalf of MSO, we hereby request, pursuant to Rule 13e-4(h)(9) under the Exchange Act, that the staff of the Division of Corporation Finance (the "Staff") of the Commission grant the Company relief from compliance with Rule 13e-4(f)(5) under the Exchange Act and confirm that the Staff will not recommend that the Commission take enforcement action pursuant to Rule 14e-1(b) and (c) in connection with the Offer. This letter supersedes our letter dated October 23, 2003.

FACTUAL BACKGROUND

MSO became a publicly traded Company in 1999. Since mid-2002, the Company has experienced a significant decline in its stock price from historical levels and is currently subject to some uncertainty relating to its future business prospects. As a result of the decline in the Company's stock price, most of the Company's outstanding stock options are out-of-the-money. As a consequence of this stock price decline, the Board of Directors of MSO has concluded that many of the Company's outstanding options no longer adequately serve the Company's compensation objectives. Accordingly, the Board of Directors of the Company determined to offer employees the opportunity to exchange some of their outstanding options for an alternative form of compensation. In the case of the Company's employees with positions below the rank of Assistant Vice President, the Board of Directors determined to offer employees the opportunity to exchange their options for the contractual right to receive a cash bonus payment, subject to an appropriate vesting period.

Under the terms of the Offer, any eligible employee whose eligible options are accepted for exchange will receive a contractual right to receive a specified cash payment on the first Company payroll date in July 2004, so long as such employee remains continuously employed by the Company through June 30, 2004 (the "Special Bonus Right"). Pursuant to the terms of the Offer, the Special Bonus Right will be granted to each participating employee, effective as of 11:59 p.m., Eastern Standard Time, on the expiration date of the Offer, in exchange for properly tendered options. Within three business days after the expiration date of the Offer, the Company will deliver to each employee a letter evidencing the Special Bonus Right. The recipients of this Special Bonus Right will be entitled to a single lump sum cash payment, subject only to the continued employment requirement noted above. Additionally, in the event of a "Change in Control" (as defined in the Plan) or termination of employee's employment by reason of death or "Disability" (as defined in the Plan), the cash payment associated with the Special Bonus Right will become immediately payable on the next scheduled Company payroll date. The Company will fund the cash payment in respect of the Special Bonus Right out of its cash on hand.

The Company is conducting the Offer for compensatory purposes in order to provide eligible employees the opportunity to benefit from their hard work despite the loss of stockholder value, and to provide an additional incentive to remain with the Company. The vesting feature of the Special Bonus Right is an essential element of the transaction, as a central purpose of the Offer is to incentivize eligible employees to remain employed with the Company during the vesting period. The June 30, 2004 vesting date was selected in order to provide eligible employees the opportunity to receive a mid-year bonus. Normally, the Company pays bonuses only at the year end and accordingly, the mid-year bonus payment is intended to incentivize eligible employees to remain with the Company during the period between the receipt of annual bonuses and the vesting date of the Special Bonus Right. This vesting date should also increase the likelihood that eligible employees will remain with the Company through the end of 2004, as they will have the opportunity to receive year-end bonuses for 2004 if they remain employed for an additional six months after the vesting date of the Special Bonus Right.

We believe that the appropriate characterization of the Offer is that the consideration being paid to tendering employees is a contractual right and that the "prompt payment" requirement of Rule 13e-4(f)(5) is satisfied because that contractual right is received at the time of acceptance of the tendered options. In our view, the fact that it is a term of the contractual right that a cash bonus will be paid only upon expiration of a vesting period should not raise any issue under Rule 13e-4(f)(5). In this regard, we believe that the Offer is not distinguishable from exchange offers in which existing options are exchanged for new options which are subject to vesting conditions. We are unaware that the Staff has objected to these types of exchange offers on the basis that they raise "prompt payment" issues. However, because the Staff has indicated that the Special Bonus Right may raise "prompt payment" concerns under Rule 13e-4(f)(5), we are submitting this request for exemptive relief.

DISCUSSION

The Staff has asserted that the payment feature of the Offer may be seen to present a "prompt payment" issue arising from the fact that the cash bonuses contemplated by the Special Bonus Right are subject to continued employment at the Company through June 2004 and will be paid on the Company's first payroll date in July 2004. However, we believe that this feature is similar to those of other tender offers conducted for compensatory purposes, for which the Staff has consistently granted exemptive relief. See, e.g., Look Smart, Ltd., SEC No-Action Letter, (March 20, 2001) (the "LookSmart Letter"); Digimarc Corporation, SEC No-Action Letter, (March 16, 2001) (the "Digimarc Letter"); Amazon.com, Inc., Ltd., SEC No-Action Letter, (Feb. 28, 2001) (the "Amazon.com Letter"); Lante Corporation, SEC No-Action Letter (Feb. 9, 2001) (the "Lante Corp. Letter") (collectively, the "Option Repricing Offers"). In the Option Repricing Offers, as a result of a steep decline in the stock prices of the issuers conducting the option exchange offers, employees of these issuers owned outstanding options issued at prices significantly above the issuers' then current stock price. The issuers in the Option Repricing Offers conducted the option exchange offers to provide incentives to employees holding out-of-the money options to continue to work for the issuers in the future. Consistent with the issuers' compensatory objectives, the new options issued to employees were generally subject to revised and extended vesting schedules. In addition, in order to avoid triggering variable accounting for options tendered in these offers, delivery of new options was deferred until more than 180 days following the expiration of the offer.

In the context of tender offers conducted primarily for compensatory purposes, the Staff has often granted relief from the requirements of Rule 13e-4 where requiring otherwise would defeat the valid business purpose for undertaking such tender offer. See, e.g., the Lante Corp. Letter. See also Microsoft Corporation, SEC No-Action Letter (October 15, 2003), pursuant to which, the Staff granted Microsoft Corporation ("Microsoft") exemptive relief from, among other requirements of Rule 13e-4, Rule 13e-4(f)(5), in connection with Microsoft's stock option transfer program (the "Microsoft Program"). The Microsoft Program was established for compensatory purposes to enable Microsoft employees to realize some value for out-of-the-money options. The Microsoft Program arguably did not comply with Rule 13e-4(f)(5) because, among other things, a portion of the consideration to be received in exchange for employees' options was subject to continued employment at Microsoft and would not be paid for approximately two to three years after the offer period expired. Microsoft stated that the "contingent payment structure [was] designed to serve Microsoft's compensatory purpose of providing incentives for continued employment by participants" and noted that the Staff had previously granted exemptive relief in tender offers where the new consideration received was generally subject to vesting requirements.

The Company believes that the payment feature of the Offer, as presently structured, presents the same issue as the contingent payment feature of the Microsoft Program for which the Staff granted an exemption from compliance with Rule 13e-4(f)(5). As discussed above, similar to the Microsoft Program, the Company is conducting the Offer for compensatory purposes to both reward and retain its employees. In this regard, MSO has structured the Offer in order that employees may realize some value for their stock options but has made receipt of such benefit subject to continued employment at the Company. Moreover, were the Company unable to include the vesting feature in the Offer, the Offer would not achieve the Company's compensation objectives, and the Company would not proceed with the Offer. Similar to the Microsoft Program, where contingent payment is promptly credited to the employee's account but subject to continued employment, employees participating in the Offer will be promptly provided with a letter evidencing their Special Bonus Right, with the related payment subject to their continued employment at the Company. Finally, the Offer prominently discloses that receipt of the cash payment is expressly subject to continued employment at the Company until June 30, 2004. As such, MSO believes that the Offer's payment feature does not constitute a fraudulent, deceptive or manipulative act or practice, and hereby requests that the Offer, as currently structured, be granted any necessary exemptive relief from compliance with Rule 13e-4(f)(5).

CONCLUSION

Based on the similarity of the compensatory objectives of the Offer, the Option Repricing Offers and the Microsoft Program, MSO believes it is appropriate to afford the Offer the same relief that has been granted in the context of the precedents established by the Microsoft Program and the Option Repricing Offers. We would appreciate your early consideration of this matter.

Should you have any questions, please call the undersigned at 212.859.8296.

Sincerely,

/s/ Warren S. de Wied _________________________

Warren S. de Wied

cc:

Gregory R. Blatt, Esq. Executive Vice President, Business Affairs General Counsel and Secretary Martha Stewart Living Omnimedia, Inc. (212) 827-8188 (fax) 11 West 42nd Street New York, NY 10036

http://www.sec.gov/divisions/corpfin/cf-noaction/stewart110703.htm

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Modified: 12/01/2003