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  Staff Interpretation Letter 2007-2
Identification Number 778
This is in response to your correspondence regarding whether a proposed amendment (the “Amendment”) to the Plan would require shareholder approval pursuant to Marketplace Listing Rule 4350(i)(1)(A) and IM-4350-5 (collectively, the “Rule”).  The Amendment, as more fully described below, would set forth that increases in the exercise prices of certain outstanding stock options is permitted under the Plan.  Executive officers and directors are not eligible to receive awards under the Plan.
According to the information you provided, the company recently discovered that it may have used an incorrect date of grant for some options that have been awarded under the Plan.  As a result, some of those options (the “Below Market Options”) may have exercise prices less than fair market value as of the correct grant date for financial reporting purposes.  You stated that under Internal Revenue Code Section 409A (“409A”), holders of such options could be subject to unfavorable tax consequences which were not contemplated at the time the grants were made.  To alleviate the unfavorable tax treatment, the company is considering amending the Below Market Options to increase the exercise price to the fair market value as of the correct grant date.
Pursuant to a specific provision of the Plan, the company’s board of directors (the “Board”) does not have the authority to: (i) reprice any option so that the exercise price becomes less than the fair market value on the grant date or (ii) take any other action that is treated as a repricing under generally accepted accounting principles.  You stated that the company believes that this provision was intended solely to withhold authority from the Board to reduce exercise prices and does not believe that the intent was to deny the authority to increase exercise prices.  The Board is contemplating the Amendment to clarify that this provision does not prohibit an increase in an exercise price to the fair market value as of the correct grant date.  After making the Amendment, the company would offer to amend eligible options to increase their exercise price.  You stated that under generally accepted accounting principles, including FAS 123(R), the company would not record any additional expense as a result of the amendments to the Below Market Options.  While FAS 123(R) does not define a repricing, under FAS 123 and FIN 44, which were in effect when the plan was adopted, these amendments would not have been treated as a repricing, which would require the recognition of additional total compensation expense.
Following our review of the information you provided, we have determined that the Amendment would not require shareholder approval under the Rule because it would not be a material amendment to the Plan.  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 Amendment would permit an increase, rather than a decrease, in the exercise price, the Amendment is not material under the Rule.  Further, the Amendment 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.  Accordingly, the Rule does not require shareholder approval of the Amendment.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 778
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