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The American Lawyer Ranks WilmerHale Among Top 20 Pro Bono Firms. William CaporizzoKimberly B. Option repricing has received renewed attention in the wake of the broad market declines that began in and have continued into At the same time, changes in stock exchange and SEC rules have made it significantly more difficult—although not impossible—for a public company to implement an option repricing, although the terms of any repricing are likely to be more stockholder-friendly than in the past.

There are three general approaches to option repricing:. Approximately 50 US public companies repriced options inrepresenting a three fold increase from A majority of the companies that repriced options in did not obtain stockholder approval, generally because they had plans that permitted repricing without stockholder approval—in many cases, these were older plans that had been previously approved by stockholders in an environment with less intense scrutiny of executive compensation practices.

Surviving Stock Option Repricing - Law

The balance of the companies that repriced options in without stockholder approval were not required to obtain stockholder approval because they were not listed on Nasdaq or NYSE, or because they paid cash for underwater options. A wide variety of employment, governance, legal, accounting and tax considerations are relevant to any option repricing program.

Each company must assess these factors in light of its own circumstances. The following summary of the principal considerations that generally are relevant when considering option repricing is extracted from a more detailed memorandum on the topic that we have prepared to assist clients who are considering option repricing. Employee Incentives Stock options are intended to provide incentives to motivate and retain the employees who are expected to contribute to the success of the company.

This rationale alone, however, will likely be insufficient to obtain stockholder approval unless the repricing is structured in a manner that meets the guidelines of the major proxy advisory services, as discussed further below. Stockholder Approval As a result of changes in Nasdaq and NYSE listing standards inlisted companies must obtain stockholder approval of option repricings unless the underlying plan specifically permits options to be repriced there is no similar requirement for companies traded in the over-the-counter market.

Although Nasdaq and NYSE rules permit a stock plan to explicitly authorize repricing without stockholder approval, listed companies have a strong incentive not to include such provisions in their plans—the leading proxy voting advisory service, RiskMetrics Group, which now operates the former ISS proxy advisory service RMGwill recommend against stockholder approval of any stock plan that permits repricing without stockholder approval.

Thus, in most cases, a company that is listed on Nasdaq or NYSE will need, or consider it prudent, to obtain stockholder approval before repricing outstanding options.

The Re-Emergence Of Stock Option Repricing - Law

RMG voting guidelines state that it evaluates option repricing proposals on a case by case basis, giving consideration to a number of factors, the three most critical of which are:. The SEC takes the position that option repricings in which employees may elect to surrender underwater options for new securities containing different vesting or exercise terms or a reduced number of shares—which is generally the case with a value-for-value exchange designed to win stockholder approval—are exchange offers which must be conducted in compliance with the tender offer rules.

The relevant tender offer rules consist of:. Investor Relations Whether or not stockholder approval of option repricing is required—and especially if stockholder approval is not required—the company should consider the investor relations consequences.

Option repricing is intensely disliked by many institutional stockholders, who view the practice as fundamentally unfair to public stockholders who cannot turn in their shares for lower priced shares when market prices drop.

With the recent and unprecedented focus on executive compensation, investor criticism of option repricing is likely to increase. Accounting Treatment Not all has worsened in the option repricing climate since the last surge in repricings in Changes in the required accounting treatment of stock options have reduced the potential accounting barriers to repricing, although it remains imperative that the company discuss the accounting implications and financial reporting requirements of any proposed repricing program with its accountants.

With variable accounting treatment, the company was required to take a charge against earnings at the end of each fiscal quarter, measured by reference to the difference between the exercise price of the repriced options and the then current fair market value of the underlying stock. The effect on earnings could be unpredictable and substantial.

As a result, many companies structured option repricing programs in a manner intended to avoid variable accounting treatment. FAS R, implemented in latenow requires all companies to estimate the fair value of an employee stock option at the grant date, using the Black Scholes or another valuation method, and to recognize that value as repricing share options expense over the option vesting period.

When an option is repriced, FAS R requires the fair value of the new options or other securities issued in exchange for underwater options minus the current fair value of the surrendered options to be recorded as compensation expense over the remaining vesting period of the repriced options or other securities. If a more employee-friendly exchange ratio is used, however, there could be significant new compensation charges.

In addition, the ongoing compensation charges associated with the cancelled options are not eliminated, even if the compensation charges associated with the repriced options are lower than the original compensation charges. Tax Consequences Option repricing generally does not result in taxable income to option holders or a tax deduction to the company, but it does present several trading stocks in ghana tax issues:.

Treatment of Foreign Employees An option repricing program made available to employees residing in foreign countries may be subject to securities, tax and system for trade binary option 60 seconds local law requirements that differ from those in the United States.

Compliance with these requirements—and providing descriptions of the securities and tax consequences in all applicable jurisdictions—can become burdensome if the company has employees in many foreign countries.

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There are three general approaches to option repricing: Options-for-optionsin which underwater options are cancelled in exchange for new options typically covering a smaller number of shares with a lower exercise price equal to or sometimes higher than the fair market of the underlying stock ; Options-for-stockin which underwater options are cancelled in exchange for shares of restricted stock or restricted stock units typically covering an even smaller number of shares since no, or a nominal, purchase price is paid for the restricted shares, enabling the recipient to benefit from the full value of the shares rather than just the value in excess of the option exercise price ; and Options-for-cashin which underwater options are cancelled in exchange for a cash payment.

RMG voting guidelines state that it evaluates option repricing proposals on a case by case basis, giving consideration to a number of factors, the three most critical of which are: Exclusion of Directors and Officers: The relevant tender offer rules consist of: The tender offer rules apply to essentially all communications in connection with an exchange offer and may, for example, require the company to file with the SEC a public announcement that it intends to reprice options.

Tax Consequences Option repricing generally does not result in taxable income to option holders or a tax deduction to the company, but it does present several potential tax issues: A modification may cause an ISO to become a non-statutory stock option NSO or may cause other negative tax consequences. Because the tender offer rules require a repricing offer to remain open for at least 20 business days, coordination of these two time periods can become tricky, especially if there are intervening holidays.

Repricing underwater stock options - Lexology

Section A of the Internal Revenue Code, which applies to all stock options granted or vesting on or after January 1,imposes harsh tax consequences on the holders of options that have an exercise price below the fair market value of the underlying stock on the date of grant. For purposes of Section A, a repricing is considered a cancellation of the underwater option and the grant of a new option.

As long as the exercise price of the new repriced option is set at or above the fair market value of the underlying stock on the date of grant, there should be no issue under Section A although an issue could arise if there is a pattern of repeated repricings.

Repriced options will be treated as new grants for purposes of Section m of the Internal Revenue Code. As a result, the per-participant limit could prevent the repricing of some or all options. Alumni Careers ClientCommons Login Media Contacts WH Connect WH Emergency Connect Email Facebook Twitter. Offices Beijing Berlin Boston Brussels Denver Frankfurt London Los Angeles New York Palo Alto Washington DC Dayton - Business Services Center Address: