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  Staff Interpretation Letter 2007-21
Identification Number 797
This is in response to your correspondence asking whether the company’s proposed course of action (the “Proposal”) with respect to the Plan 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 modify certain stock options granted under the Plan to avoid adverse tax consequences under Internal Revenue Service Code Section 409A (“409A”).
According to the information you provided, certain options were granted with an exercise price less than fair market value on the date of grant (the “Discounted Options”).  You stated that under 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 optionholders 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 optionholders to be subject to these adverse tax consequences.
Under the Proposal, to prevent the application of 409A to the optionholders, the company would: (i) increase the exercise price per share of the Discounted Options to the fair market value as of the date of grant and
(ii) pay the optionholder the amount equal in value to the difference between the original exercise price and the revised exercise price (the “Payment”).  The Payment would be in cash or in shares of common stock in the form of restricted stock units (“RSUs”).  The RSUs issued as Payment would be granted under the Plan subject to the maximum number of shares reserved under the Plan.  These RSUs would be subject to the same vesting schedule as the options for which the exercise price was increased.  Optionholders who are employees of the company at the time the Payment is made would receive the Payment in RSUs.  Cash, instead of RSUs, would be paid: (i) for fractional shares and (ii) if the number of RSUs that otherwise would be issuable to an optionholder would be less than a minimum that may be established by the company.  If the optionholder is no longer an employee at the time the Payment would be made, the Payment would be made in cash and would be made only for those options that would be vested as of the date of the employee’s termination.
Pursuant to the Plan, the administrator may at any time offer to buy out an option for a payment in cash or in shares of common stock based on terms and conditions established by the administrator.  The Plan provides for awards of both stock options and shares of common stock (including restricted shares), although it does not currently provide for RSUs.  An award of an RSU typically results in the issuance of restricted stock on a deferred basis after vesting requirements are met.
Following our review of the information you provided, we have determined that the Proposal would not be a material amendment to the Plan under the Rule and, therefore, would not require shareholder approval under the Rule.  This conclusion is based on your representations that the purpose of the Proposal is to address the tax consequences of 409A.  The Proposal would not result in a material increase in benefits to the participants.  In that regard, the exercise price would increase rather than decrease, and the Payment would equal the value of the difference between the revised exercise price and the original exercise price.  The Payments would be consistent with the Plan’s provisions that authorize the company to buy back outstanding options for cash or stock.  In addition, adding RSUs to the permissible types of awards under the Plan is not an expansion in the types of awards available because the Plan already authorizes awards of restricted stock, and RSUs are substantially equivalent to awards of restricted stock.  Further, because any shares that would be issued as a Payment would be subject to the Plan’s authorized share reserve, the Proposal would not increase the number of shares available under the Plan.  We also note that the Proposal would not result in an expansion of the class of eligible participants.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 797
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