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Staff Interpretation Letters
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Identification Number
749
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This is in response to your correspondence regarding whether the company’s proposed course of action (the “Proposal”) with respect to Plan 1 and Plan 2 (collectively, the “Plans”) would require shareholder approval pursuant to Marketplace Listing Rule
4350(i)(1)(A) and IM-4350-5 (collectively, the “Rule”). The Plans are equity compensation plans. Under the Proposal, as more fully described below, the company would increase the exercise price of certain outstanding stock options and make a cash payment
to the affected optionees.
According to the information you provided, in the course of a review of its financial statements, the company discovered that it may have used an incorrect date of grant for determining the exercise prices of certain options that were awarded under the
Plans. As a result, some of those options may have exercise prices less than market value as of the correct grant date (the “Correct Date”) for financial reporting and tax purposes. You stated that such misdated options may be deemed to result in “deferred
compensation” under Internal Revenue Code Section 409A and, therefore, may subject the optionees to significant adverse taxation upon vesting and exercise, contrary to the company’s intent. The company believes that the Proposal would have the effect of eliminating
the adverse taxation while preserving the original compensatory benefits. The Proposal would be conducted as a tender offer under the rules of the Securities and Exchange Commission and would be open for at least 20 business days.
Under the Proposal each misdated option held by a current employee (excluding current or former executive officers) would be amended to adjust the exercise price to the lower of: (i) the fair market value of the common stock on Correct Date (the “Correct
Date Price”), and (ii) the closing price of the common stock on the last day of the offer. The amended exercise price is called the “Revised Price”. Thereafter, the company would either:
- If the Revised Price is higher than the original exercise price for the option, the company would pay the affected optionee an amount of cash equal to the increase in the exercise price for each affected option; or
(2) If the Revised Price is the same as, or lower than, the original exercise price, the option will be repriced to the Correct Date Price and then cancelled and replaced with a new option having an exercise price equal to the original exercise price.
In this situation the optionee will not receive a cash payment.
As a result of the Proposal, no optionee will receive a corrected option with an exercise price of less than the original price or receive a cash payment in excess of the minimum increase in the exercise price necessary to avoid the consequences of Section
409A.
Pursuant to the provisions of each of the Plans, the plan administrator has the authority to amend, modify, or cancel any outstanding award with the consent of the holder. Neither of the Plans specifically prohibits the company’s ability to: (i) cancel
an outstanding award and issue a replacement award, or (ii) conduct any other action that may be interpreted as repricing.
Following our review of the information you provided, we have determined that the Proposal would not require shareholder approval under the Rule because it would not be a material amendment to the Plans. In that regard, pursuant to IM-4350-5, a material
amendment includes any material increase in benefits to participants, including any material change to: (i) permit a repricing (or decrease in exercise price) of outstanding options; or (ii) reduce the price at which options may be offered. Because the Proposal
would result in an increase (or no change), rather than a decrease, in the exercise price, the Proposal is not material under the Rule. Further, the Proposal would not result in an increase in the number of shares to be issued under the Plan, an expansion
of the class of eligible participants, or an expansion in the types of awards available. Finally, based on these facts, the cash payment to be made in connection with the change in exercise price to employees other than current and former executive officers
does not raise concerns under the Rule. These conclusions are based on your representations that the purpose of the Proposal is to address the tax consequences of Section 409A.
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Publication Date*:
7/31/2012
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Identification Number:
749
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