(go back), 2While this post was written with public companies in mind, many of the principles, and in particular the outline of the four main strategies for addressing underwater options, apply to both public and private companies alike. The major drawback to an option-for- option exchange is the risk remains that the newly granted options could also wind up underwater if the company’s stock price continues to decline. consider each repricing or option exchange proposal on a case-by-case basis based on the factors described below. Accelerate your vesting, partially or in full. The optionholder consents to a cancellation of his or her existing option in exchange for a new equity award (whether in the form of options or a different type of equity award, such as restricted stock or restricted stock units (RSUs)). What are the strategies for addressing underwater options? Additionally, if named executive officers are participating in the option repricing or exchange program, then the material terms of the program must be described in in the company’s Compensation Discussion and Analysis section of the proxy statement for the year in which the repricing or exchange occurs, and the incremental value of the modified award will need to be disclosed in the “Summary Compensation Table” and the “Grants of Plan-Based Awards” table for the named executive officers and the “Director Compensation Table” for the directors. The offer to exchange must be distributed to all eligible employees either by mail or electronically. That is, if I exercise underwater ISOs, can I claim a loss? modify underwater stock options. In particular, some companies may find that the exercise price of their outstanding options and stock appreciations rights (SARs) substantially exceeds the company’s current stock price (for purposes of this memorandum, we refer to such options and SARs collectively as “underwater options”). Section 409A of the Internal Revenue Code places restrictions on the ability of employees and employers to defer compensation and to determine when income may be realized and taxed. This is a problem for employees and companies alike. In such a circumstance, Glass Lewis will recommend supporting a repricing proposal if the following conditions are met: officers and directors cannot participate in the program; the stock decline mirrors the market or industry price decline in terms of timing and approximates the decline in magnitude; the exchange value is value-neutral or value-creative to shareholders using very conservative assumptions; and. Where the decline in a company’s stock price is not a result of management’s performance, but due to the market conditions themselves, implementing some type of option repricing or exchange program may make sense. See a related FAQ on the various approaches companies take to the problem of underwater stock options. Company ABC has 1.0 million underwater stock options granted at exercise prices of $18, $20, and $22, respectively (3.0 million total options), with remaining terms of 6, 7, and 8 years. In a one-for-one exchange, each underwater option is cancelled in exchange for one new option, just at the lower exercise price. . . Companies should consult with their accountants when considering any option repricing or exchange program. By: James Graves and Joe Wallin There may be times during the life of your company in which you will want to reprice underwater stock options. 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