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  Staff Interpretation Letter 2022-04
Identification Number 1856
This is in response to your correspondence regarding whether a repricing of certain previously granted options, by lowering the exercise price per share, issued under the Plan would require shareholder approval pursuant to Listing Rules 5635(c) and IM-5635-1 (collectively, the “Rule”) (Question 1).  Separately, you asked whether Listing Rule 5635(c)(4) permits issuance of awards in reliance on this rule pursuant to an Inducement Plan that was adopted after the awards were offered and accepted by newly hired employees, but not yet issued (Question 2).

Question 1

According to the information you provided, the Plan, which was approved by the Company’s shareholders, authorizes an “Exchange Program” and provides that the plan administrator can determine the terms and conditions of any Exchange Program in its sole discretion, subject to any required shareholder consent.  The Plan defines an Exchange Program as a program under which outstanding awards are surrendered or canceled in exchange for awards of the same type (which may have higher or lower exercise prices and different terms), awards of a different type, and/or cash, and further provides that under an Exchange Program the exercise price of an outstanding Award can be increased or reduced.  Based on this language, you stated that the Company’s management and the administrator of the Plan, consisting of independent members of the Company’s Board of Directors, each believe that the Plan specifically authorizes a repricing of awards where an exercise price of a previously issued option is reduced.  You stated that the Plan’s definition of an Exchange Program includes an action by a Plan administrator to reduce the exercise price of an outstanding award.   You further stated that none of the Company’s organizational documents, including certificate of incorporation and bylaws, contracts, or other corporate governance documents require shareholder approval of a repricing, as described above. 

Following our review of the information you provided, we have determined that lowering the exercise price per share for previously granted options under the Plan does not require shareholder approval under the Rule because the administrator of the Plan is already specifically authorized to conduct such an action, by the Plan, which was previously approved by the Company’s shareholders, and the Company is not proposing to amend the Plan.

Question 2

Separately, you stated that the Company also is considering adopting an equity compensation plan, which would be used only to grant awards to individuals as inducements material to their entering into employment with the company (the “Inducement Plan”).  You stated that all awards made under this plan would satisfy the requirements of Listing Rule 5635(c)(4).  You further stated that the Company has hired new employees pursuant to offer letters that describe equity grants to be made to the new employees if they accept employment with the Company, but that the grants described in those offer letters have not yet been made (the “Prior Inducement Awards”). You also indicated that the Prior Inducement Awards meet all of the requirements of Listing Rule 5635(c)(4).  You asked whether the Prior Inducement Awards could be made under the newly adopted Inducement Plan.  

Following our review of the information you provided, we have determined that the Company may issue the Prior Inducement Awards under the newly adopted Inducement Plan without obtaining shareholder approval for the awards or the plan. We have reached this conclusion because, under the Rule, Inducement Awards do not require shareholder approval and the Rule does not prescribe any specific administrative aspects for an Inducement Plan, such as the timing of its adoption.  Please note that pursuant to Listing Rule 5635(c)(4), inducement awards must be material to the recipient entering into employment with the company, must be approved by either the issuer's independent compensation committee or a majority of the issuer's independent directors, and, promptly following an issuance of any inducement awards, the company must disclose in a press release the material terms of the grant, including the recipient(s) of the grant and the number of shares involved.
Publication Date*: 1/13/2022 Mailto Link Identification Number: 1856
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