Employee Benefits
Time to Consider Option Repricings?
May 17, 2022
Given recent declines in equity value in a variety of segments of the economy (technology in particular), a number of clients have asked us what levers are available for retaining talent. While they are rare and while we might be too early in the economic cycle for them, stock option repricings remain a possible tool in the toolkit for both public and private company issuers. Below we summarize a few key repricing and exchange concepts for both public company and private company repricings or exchanges:
Structure:
- Straight Repricing. Outstanding and out of the money options are amended by the issuer to reset the exercise price to the current fair market value of the stock at the time of the repricing. Sometimes additional vesting conditions might be added to the repriced option.
- Stock Option-for-Stock Option Exchange. In an option-for-option exchange, stock options that are out of the money are cancelled and replaced by the issuer with new stock options that have an exercise price that is equal to or greater than the current fair market value of the stock at the time of the new grant. In this program, the issuer and its financial advisors and/or external compensation consultants develop a financial model to determine the option exchange ratio such that the value of the new option equals the value of the forfeited option. Here it would not be uncommon to see additional vesting conditions might be added to the new option.
- Stock Option-for-Other Award Program. In a stock option-for-other award exchange program, out of the money stock options are exchanged for a different equity instrument typically a full value instrument such as restricted stock or restricted stock units. The benefit for the participant of replacement with a full value instrument during volatile times is that restricted stock and restricted stock units will hold at least some value even if the issuer’s stock price continues to decline. Again, we would expect that additional vesting conditions might be added to the new equity award instrument.
Shareholder Approval:
- For a publicly traded issuer, unless the issuer’s equity plan has express language that allows for repricings and/or exchanges without shareholder approval, both the NYSE and NASDAQ require shareholder approval prior to a repricing or exchange. In our experience, very few equity plans include this express language so shareholder approval for a public company will almost certainly be required as a gating item for a repricing or exchange program. Along these lines, Institutional Shareholder Services (“ISS”) will generally recommend a vote against an equity plan proposal if the plan permits the repricing and/or cash out of underwater options or stock appreciation rights without shareholder approval.
- In our experience private company issuers need not obtain shareholder approval to initiate a repricing. That said, there could be a blue sky state securities law or a quirky provision in an existing private company equity plan document that might mandate shareholder approval so private company issuers should engage competent counsel before undertaking a stock option repricing or exchange.
ISS and Glass Lewis
- Generally speaking both ISS and Glass Lewis view repricings and exchanges in a negative light, particularly where an equity plan permits repricing without shareholder approval. ISS has a broad definition of repricing, which can be found in Q&A-40 here.
- Glass Lewis’ policy provides more guardrails around what it might find offensive for issuers that move forward with repricings or exchanges. Those guardrails can be found here. In particular we note that Glass Lewis does not want officers and board members to participate in the repricing or exchange. Glass Lewis generally wants the vesting requirements of any new equity granted in an exchange, or the vesting requirements applicable to repriced options, to be at least 12 months.
Other Issues:
- Repricings and exchanges implicate a number of other complex issues including, without limitation, tax issues, securities law issues (including tender offer issues), and accounting issues. Any issuer (public or private) that is considering a repricing should engage experienced financial, accounting and legal advisors if they are considering an option exchange or repricing.
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