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Frequently Asked Questions
  Staff Interpretation Letter 2006-22
Identification Number 832
This is in response to your correspondence regarding whether the company’s proposed course of action (the “Proposal”) with respect to two of its stock option plans (collectively, the “Plans”) would require shareholder approval pursuant to Marketplace Listing Rule 4350(i)(1)(A) and IM-4350-5 (collectively, the “Rule”).  Under the Proposal, as more fully described below, the company would buy back certain outstanding stock options for cash and increase the exercise prices of certain other outstanding options in exchange for a cash payment.
According to the information you provided, as permitted under the Plans, certain option grants were made at less than fair market value on the date of the grant.  You stated that under Internal Revenue Service Code Section 409A, any stock option with an exercise price less than fair market value on the date of grant constitutes deferred compensation and must comply with Section 409A.  As such, the optionees likely would be subject to potentially significant additional taxation at the time of vesting.  You stated that it was not the company’s intent for the optionees to be subject to these tax consequences.
Under the Proposal, the company would take the following two courses of action to prevent the application of Section 409A to the optionees:
  1. Where the fair market value of discounted stock options at the time of grant is known, the company would increase the exercise price of such options to 100% of the fair market value on the stock options’ original date of grant and compensate optionees for the increased exercise price with a cash payment equal to the spread between the original exercise price and the revised exercise price of the stock options (the “Exercise Price Increase”); or
(2) Where the fair market value of the stock option cannot be determined, the company would provide optionees with a cash payment equal to the stock options’ current Black-Scholes value in exchange for the cancellation of such stock options (the “Option Repurchase”).
Under the provisions of the Plans, the administrator may at any time offer to buy out for a payment in cash or in shares of common stock an option previously granted based on such terms and conditions as the administer shall establish and communicate to the optionees.
Following our review of the information you provided, we have determined that the Proposal would not be a material amendment to the Plans under the Rule.  The Proposal would not result in a material increase in benefits to the participants.  In that regard, the Exercise Price Increase would increase rather than decrease the exercise price, and the cash payment to the optionees in connection with that change would equal the difference between the revised exercise price and the original exercise price.  You stated that the Exercise Price Increase and the cash payment would be consistent with the approach envisioned by the Internal Revenue Service in the regulatory proceedings to implement Section 409A.  In making this determination, NASDAQ notes that less than 10% of the options subject to the Exercise Price Increase are presently out of the money.  The Option Repurchase also would not result in a material amendment to the Plans because the Plans specifically permit the company to do so and because the consideration to be paid would be cash, and not equity.  We also note that the Proposal would not result in an increase in the number of shares to be issued under the Plans, an expansion of the class of eligible participants, or an expansion in the types of awards available.  Accordingly, the Rule does not require shareholder approval of the Proposal.  This conclusion is based on your representations that the purpose of the Proposal is to address the tax consequences of Section 409A.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 832
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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