스톡 옵션 수정 409a

Q & A 포럼.

회사는 스톡 옵션을 환원하기 위해 409a의 가치 평가를 완료해야합니까? 회사가 옵션 가격을 책정 할 수있는 또 다른 방법이 있습니까?

친구의 회사는 작년에 가치가 떨어졌고 직원들의 스톡 옵션을 다시 원하고 있기 때문에 회사의 실적이 좋을 때 더 많은 이익을 얻을 수있는 기회가있었습니다. 그들은 새로운 파업 가격을 설정하고 이전에 발행 된 모든 옵션을 재 계산하는 가장 좋은 방법을 결정하려고 노력하고 있습니다. 이전에이 작업을 수행했거나 아이디어가 있다면 다른 사람이 의견을 제공 할 수 있습니까?

409A를받을 필요가 없지만, IRS가 사실 (몇 년 후)로 돌아와서 당신이 생각한 가치가 너무 낮다고 말하는 위험이 있습니다. (실제로 409A 문서가 없으면 옵션을 발행 할 때마다 위험이 있습니다.) 그러면 회사의 필요성이 아닌 고용인에게 엄청난 세금 문제가됩니다. 직원은 추가 소득을 징수해야하며 추가 소득세와 벌금을 내야합니다 (차액 보상을 위해 회사를 고소 할 수도 있음). 409A 평가를받는 것에 대한 대안이 있지만, 당신은 compentent 평가 전문가에 의해 완성 된 것을 얻는 것이 가장 좋습니다. 또한 가격 책정으로 인해 발생할 수있는 123R 계산을 지원할 수있는 항목이 필요합니다. P & L에 대한 비 현금 수수료이지만, 재조정으로 인해 귀하가 가지고있을 수있는 대출 약정을 위반하지 않았는지 확인해야합니다.

409A를하는 것은 고통 스럽지만, FMV에서 옵션을 발급하는지 확인하는 것이 좋습니다. 행운을 빕니다. . repricing은 많은 서류 작업입니다 .. 당신은 IRS 100k 제한을 넘어서게하는 ISO 조정을 찾아야하기 때문에 좋은 법률 팀 작업을해야합니다.

귀하의 통찰력에 감사드립니다. 매우 감사.

회사 : New Venture Support, Inc.

일반적으로 법률 고문은이 문제와 관련된 지침을 제공 할 수 있어야합니다. 독립적 인 409a 평가는 실제로 국세청의 세이프 하버 운동입니다. 이 문제는 파업 가격이 가치가있다면 옵션 보유자와 발행자 모두에게 세금 영향을 미칠 수 있다는 것입니다.

귀하의 통찰력에 감사드립니다. 매우 감사.

무료 회원 가입.

비즈니스 거래.

비즈니스 교환을 찾아 정보, 리소스 및 동료 리뷰를 찾아 비즈니스에 적합한 솔루션을 선택할 수 있도록하십시오.

민간 기업의 일반 주식 가치 평가 및 옵션 가격 결정.

409A 미만의 10 년 평가.

비상장 기업과 법률 및 회계 고문이 최근 발행 된 우선주의 가격에서 적절한 할인을 느슨하게 추정하여 옵션 행사 가격을 설정하기 위해 보통주의 공정한 시장 가치를 결정하는 것은 오랜 기간 실시 된 사례입니다 회사 발전 단계. 이전에 국세청 (IRS & rdquo; 또는 & ldquo; 서비스 & rdquo;) 및 증권 거래위원회 ( "SEC")가 수락 한이 관행은 초기 내부 수익 코드 섹션 409A 1 지침에 의해 갑자기 종료되었습니다 과거 관행과는 달리, 섹션 409A 규정 (2007 년 국세청 (IRS)이 최종 판결)에는 비공개 기업의 보통주의 공정한 시장 가치를 결정하기위한 세부 지침이 포함되어 있습니다. 합리적인 가치 평가 방법 또는 합리적인 평가 방법을 사용하는 합리적인 적용; 또는 "안전한 항구"를 포함합니다. 이러한 규칙은 민간 기업의 보통주 평가 및 옵션 가격 결정 방식을 재구성했습니다.

이 기사에서는 먼저 409A 절의 보통주 가치 평가 방법에 대해 간략하게 설명합니다. 영원한 적절한 할인 방법. 다음은 세이프 하버 (Safe Harbors)를 포함하여 IRS가 발급 한 섹션 409A 지침에 의해 설정된 평가 규칙에 대해 설명합니다. 그런 다음 우리가 관찰 한 성숙 단계와 크기가 다양한 비상장 기업들의 반응을 설명합니다. 어떤 경영진, 이사회 및 고문이 실제로 그 일을하는지. 마지막으로 지금까지 살펴본 모범 사례를 설명합니다.

이 기사는 409A 절의 모든 문제를 다루는 것이 아닙니다. 이 기사의 초점은 409A 항이 비 한정 주식 스톡 옵션 (& nbsp; NQO & rdquo;) 행사 가격을 설정하기위한 비공개 기업의 보통주 평가에 미치는 영향으로, 그러한 옵션은 섹션 409A의 적용에서 면제됩니다. 409A 및 & mdash; 이유는 다음과 같습니다. & ndash; 인센티브 스톡 옵션 ( "ISO")의 행사 가격을 설정하기위한 목적으로도 ISO는 섹션 409A의 적용을받지 않습니다. 이 조항의 범위를 벗어나는 옵션 조항 및 비 한정 이연 보상에 대한 섹션 409A의 효과와 관련하여 여러 가지 중요한 문제가 있습니다. 2.

소개.

내국세 법 (Internal Revenue Code) 제 409A 조가 제정 된 이래로 거의 10 년이되었습니다. 이것은 IRS에 의해 최종 Section 409A 규정이 발행 된 지 1 년 후인 2008 년에 작성한 기사의 업데이트입니다. 이 기사에서, 우리는 이전에했던 것처럼, 직원들에게 ISO 및 NQO의 보상 교부를위한 행사 가격을 설정하기 위해 비상장 기업의 보통주 평가에 대해 409A 항의 적용을 설명하고, 지난 10 년 간 주식 가치 평가와 옵션 가격 결정에서 우리가 관측 한 사례.

섹션 409A의 중요성을 이해하려면 섹션 409A의 채택 전후에 비 자격 부여 스톡 옵션에 대한 세법을 이해하는 것이 중요합니다. 제 409A 항 제정 이전에, 서비스에 대한 NQO를 부여받은 피선거인은 부여 시점에 과세되지 않았습니다. 4 오히려 옵션 행사 당시 행사 가격과 기본 주식의 공정한 시장 가치 사이의 "스프레드"에 대해 피선 당사자가 과세 대상이었다.

409A 항은 비 규정 스톡 옵션에 대한 소득세 처리를 변경했습니다. 409A 항에 의거하여, 서비스와 교환하여 NQO가 부여 된 피 준주는 & ldquo; spread & rdquo;에 대한 즉각적인 소득세가 부과 될 수 있습니다. 비 정규화 주식 매수 선택권이 부여 된 연말의 행사 가격과 공정한 시가 총액 사이에 (그리고 근본적인 주식 가치가 증가 할 때까지 운동하기 몇 년 전에) 20 % 과징금과이자를 더한 금액. NQO를 허가 한 회사는 소득세를 적절하게 보류하지 않고 고용 세금을 지불하지 않으면 부작용을 초래할 수 있습니다. 다행스럽게도, 부여 일에 기본 주식의 공정한 시장 가격보다 낮지 않은 행사 가격으로 부여 된 NQO는 409A 항 및 잠재적으로 부정적 세금 결과로부터 면제됩니다. 5.

ISO가 409A 조항의 적용을받지 않는 반면, ISO가 될 의도였던 옵션이 나중에이 문서의 범위를 벗어나는 여러 가지 이유로 (비록 중요하게는 부여되는 것을 포함하여) ISO로 인정되지 않는 것으로 결정되면 행사 가격이 기본 보통주의 공정한 시장 가치보다 낮은 경우), 부여 일로부터 NQO로 취급됩니다. ISO에 적용되는 규칙에 따라, 부여 일 현재 행사 가격이 기본 주식의 공정한 시장 가격보다 낮기 때문에 옵션이 ISO가되지 못할 경우 일반적으로 옵션은 회사로 행사 가격을 공정한 시가로 책정하기 위해 선의로 시도했다. 6409A 항에 의해 확립 된 평가 원칙을 따르지 않는 회사는 공정한 시장 가치를 확인하기 위해 선의로 시도하지 않은 것으로 간주되어 옵션이 ISO로 취급되지 않고 행사 가격이 공정 시장 가격보다 낮은 NQO에 대해 섹션 409A의 모든 결과가 적용됩니다. 따라서, 409A 절 평가 원칙을 사용하여 공정 가치로 ISO 실행 가격을 설정하는 것도 좋은 관행이되었습니다.

지난 10 년 동안 고객에게 자문을 제공 했으므로 지원 가능한 공정 시장 가치를 확립하는 것이 409A 섹션의 환경에서 매우 중요합니다.

섹션 409A 이전에 보통주 옵션의 행사 가격이 어떻게 설정 되었습니까?

섹션 409A와 관련하여 국세청 지침이 발행 될 때까지 보통주에 대한 인센티브 스톡 옵션 ( "ISO")의 행사 가격을 설정하는 사유 기업의 오랜 관행은 간단하고 쉽고 실질적으로 IRS는 그것에 관해 많은 것을 말해야합니다. 신생 기업의 경우, ISO 행사 가격은 창업자가 보통주에 대해 지불 한 가격으로 편안하게 정할 수 있으며 종종 목표는 조기 종업원에게 가능한 한 저렴하게 상승 여력 기회를 부여하는 것이 었습니다. 후속 투자 이후에 행사 가격은 투자자에게 판매 된 보통주의 가격으로 또는 투자자에게 판매 된 최 신 우선주의 가격에서 할인하여 결정되었습니다. 예시를 위해 유능하고 완전한 관리 팀, 출시 된 제품, 수익 및 마감 된 C 라운드가있는 회사는 50 %의 할인을 사용했을 수 있습니다. 모두 비 과학적이었습니다. 회사는 옵션 가격 책정을위한 독립적 인 평가를 거의받지 못했고 감사원과상의했지만 그리고 그들의 의견은 무게를 실었다. 비록 팔레스타인 인이 반드시 그런 것은 아니지만. 그들 사이의 대화, 경영진 및 이사회는 일반적으로 매우 간단했습니다.

섹션 409A에 따른 평가 규정 9.

섹션 409A에 관한 국세청 지침은 민간 기업과 이사회가 보통주의 가치를 결정하고 옵션의 행사 가격을 결정할 때 극도로 다른 환경을 조성했습니다.

일반 규칙. 섹션 409A 지침은 평가 일 현재의 공정한 시장 가치가 모든 사실에 근거하여 "합리적인 평가 방법의 합리적인 적용에 의해 결정된 가치"라는 규칙 ( "일반 규칙"이라고 부름)을 규정합니다 상황. 가치 평가 방법은 회사의 가치에 대한 모든 이용 가능한 정보 자료를 고려하고 일관되게 적용되는 경우 "합리적으로 적용"됩니다. 평가 방법은 해당되는 경우 다음을 포함하는 요소를 고려하면 "합리적인 평가 방법"입니다.

회사의 유형 자산 및 무형 자산의 가치, 회사의 예상 미래 현금 흐름의 현재 가치, 비슷한 사업에 종사하는 유사한 회사의 주식 또는 지분의 시장 가치, 판매 또는 이전을 포함한 최근의 거래 규모 가치 평가 방법이 회사, 주주 또는 채권자에게 실질적인 경제적 영향을 미치는 다른 목적을 위해 사용 되든간에, 시장성의 결여에 대한 그러한 주식 또는 지분의 조정, 보험료 또는 할인 통제.

일반 규칙에서는 (i) 계산 일 이후에 가치에 실질적으로 영향을 줄 수있는 정보를 반영하지 못하는 경우 (예 : 높은 가치로 자금 조달 완료, 중요한 획기적인 성과 달성 등) 주요 제품의 개발 완료 또는 핵심 특허의 발행 또는 중요한 계약의 종료) 또는 (ii) 사용 된 날짜보다 12 개월 이전의 날짜에 대해 계산 된 값. 회사가 다른 목적을 위해 주식 또는 자산의 가치를 결정하기위한 평가 방법의 일관된 사용은 제 409A 절 목적을위한 평가 방법의 타당성을 뒷받침합니다.

회사가 일반 규칙을 사용하여 주식을 평가하는 경우 IRS는 평가 방법이나 그 적용이 부당하다는 것을 보여줌으로써 공정 시장 가치에 성공적으로 도전 할 수 있습니다. 방법이 합리적이고 합리적으로 적용되었다는 것을 입증해야하는 부담은 회사에 있습니다.

세이프 하버 평가 방법. 평가 방법은 섹션 409A 가이던스에 구체적으로 설명 된 3 가지 세이프 하버 평가 방법 중 하나에 해당하는 경우 추정적으로 합리적인 것으로 간주됩니다. 일반 규칙에 의거하여 설립 된 가치와는 달리 IRS는 평가 방법 또는 그 적용이 매우 합리적이지 못하다는 것을 증명함으로써 세이프 하버의 사용으로 수립 된 공정 시장 가치에 성공적으로 도전 할 수 있습니다.

세이프 하버는 다음을 포함합니다 :

독립적 인 평가에 의한 평가. 독립적 인 감정 평가사 ( "독립적 인 감정 평가 방법"이라고 부름)가 수행 한 평가는 옵션 부여 일보다 12 개월 이전의 평가 일 경우 합리적인 것으로 간주됩니다. 합리적인 좋은 신념 창업의 가치 평가. 합리적이고 성실하게 작성되고 서면 보고서 ( "시작 방법"이라고 부름)을 통해 입증 된 경우 10 년 이상 진행된 중요한 무역이나 사업이없는 개인 회사의 주식 평가 ")는 다음 요건을 충족하는 경우 합리적으로 추정됩니다. 평가는 일반 규칙에 지정된 평가 요소를 고려하며 이전 평가가 적용되지 않을 수있는 평가 이후 사건이 고려됩니다. 가치 평가는 유사한 평가를 수행하는 데 상당한 지식, 경험, 교육 또는 교육을받은 사람이 수행합니다. "중요한 경험"은 일반적으로 비즈니스 평가 또는 평가, 재무 회계, 투자 금융, 사모 펀드, 담보 대출 또는 회사가 운영되는 사업 또는 산업 분야의 기타 유사한 경험에서 5 년 이상의 관련 경험을 의미합니다. 가치가있는 주식은 회사의 첫 거부권 또는 직원 (또는 다른 서비스 제공자)이 비 관련자가 구매 제안을 수령 할 때 주식을 환매 할 권리를 제외하고는 어떠한 풋 또는 콜 권리의 대상이되지 않습니다 제 3 자 또는 서비스 종료. 회사는 가치 평가가 적용되는 시점에 보조금 지급 후 90 일 이내에 통제 행사가 변경되거나 보조금 지급 후 180 일 이내에 증권을 공개 할 것으로 합리적으로 예상하지 않습니다. 수식 기반 평가. 또 다른 세이프 하버 ( "수식 방법"이라고 부름)는 장부가, 합리적인 배수의 수익 또는 합리적인 조합으로 옵션 행사 가격을 책정하는 수식을 사용하는 회사에서 사용할 수 있습니다. 포뮬러 방법은 (a) 취득한 주식이 보유자에게 주식을 판매하거나 다른 방식으로 회사로 이전하도록 요구하는 양도에 대한 영구적 인 제한을 조건으로하며, (b) 포뮬러 방법이 회사에서 일관되게 사용되는 경우 회사 또는 모든 주식 종류의 총결권 주식 중 10 % 이상을 소유하고있는 모든 사람 (보상 및 비 보상)에 대한 주식 양도 (또는 유사한 종류) 실질적으로 회사의 모든 뛰어난 주식의 팔 길이의 판매.

회사의 평가 방법에 대한 선택.

섹션 409A 평가 환경에서 기업은 다음 3 가지 조치 중 하나를 결정할 수 있습니다.

409A 이전 관행을 따르십시오. 회사는 409A 이전의 가치 평가 방법을 따르기로 선택할 수 있습니다. 그러나 옵션 행사 가격이 IRS에 의해 나중에 제기 될 경우 회사는 일반 규정에 따라 필요한 주식 평가 방법이 합리적이고 합리적으로 적용되었음을 입증해야하는 부담을 완수해야합니다. 그 증거에 대한 기준은 제 409A 항 지침의 규칙, 요인 및 절차가 될 것이며, 회사의 기존 옵션 가격 결정 관행이 그러한 규칙, 요인 및 절차를 명확하게 참조하고 따르지 않으면 거의 확실하게 그러한 부담과 불이익을 피할 수 있습니다 섹션 409A의 세금 결과가 발생합니다. 섹션 409A 일반 규칙에 따라 내부 평가 연습. 기업은 일반 규칙에 따라 내부 주식 평가를 수행 할 수 있습니다. 결과 옵션 행사 가격이 나중에 국세청에 의해 제기되는 경우 회사는 주식 가치 평가 방법이 합리적이고 합리적으로 적용되었음을 입증해야하는 부담을 다시 채워야합니다. 그러나 현재 회사는 409A 항의 지침에 따라 가치 평가가 이루어 졌음을 보여줄 수 있기 때문에이 부담을 충족시킬 수있는 가능성은 훨씬 높다고 생각하는 것이 타당합니다. 안전한 항구 방법 중 하나를 따르십시오. 위험을 최소화하고자하는 회사는 3 가지 세이프 하버 중 하나를 사용하여 합리적인 가치 평가를하게됩니다. 세이프 하버 (Safe Harbor)에서 결정된 가치에 도전하기 위해 IRS는 평가 방법이나 신청이 지나치게 비합리적임을 보여 주어야합니다.

실용적인 솔루션 및 모범 사례.

2008 년이 기사의 첫 번째 초안을 작성했을 때, 우리는 민간 기업의 평가 패턴이 시작 단계에서부터 급격한 경계없이 유동성 이벤트의 예상에 이르기까지 연속적으로 하락하고 있다고 제안했습니다. 유동성 사건에 대한 기대. 그 이후로 우리의 실천에서 경계가 독립적 인 감정을 얻을 수있는 충분한 자본을 가진 사람들과 그렇지 않은 사람들 사이에 있다는 것이 분명 해졌다.

창업 단계 회사. 회사 창립에서 중요한 자산 및 운영을 시작하는시기에 이르는 초기 단계에서 IRS 가이던스에 설명 된 잘 알려진 평가 요소 중 많은 부분을 적용하기가 어렵거나 불가능할 수 있습니다. 회사는 일반적으로 옵션이 아닌 창립 주주에게 주식을 발행합니다. 회사가 여러 직원에게 옵션을 부여하기 전까지는 409A 항이 덜 우려 할 것입니다. 중요한 옵션 보조금이 시작된 후에도 회사는 창업 단계 회사의 엄격한 재무 상황에 대비하여 섹션 409A를 준수하지 못하는 것에 대한 최종 보호를 달성하기위한 잠재적으로 중요한 달러 및 기타 비용의 균형을 맞추고 있습니다.

409A 항의 초창기에 전문 평가 회사의 평가 비용은 연령, 매출, 복잡성, 위치 수, 지적 재산 및 조사 범위를 통제하는 기타 요인에 따라 약 1 만 달러에서 5 만 달러 이상에 달했습니다 회사의 가치를 결정하는 데 필요합니다. 현재 많은 수의 설립 및 신규 평가 회사가 가격을 기준으로 한 409A 평가 비즈니스를 위해 경쟁하고 있으며 그 중 많은 회사가 초기 비용을 5,000 달러까지, 일부는 최저 3,000 달러까지 제공하고 있습니다. 일부 평가 회사는 연말 평가에 대한 업데이트로 분기 평가가 할인 된 경우 '패키지 계약'을 제공하기도합니다. 독립적 인 평가 방법의 비용이 현재 매우 낮지 만 많은 초기 창업 기업은 운영을 위해 자본을 보존 할 필요가 있기 때문에 독립적 인 평가 방법을 수행하기를 꺼립니다. 수식 방법의 사용은 제한적인 조건으로 인해 사용하기에 적합하지 않으며 초기 단계의 신생 기업의 경우 수식 방법에 장부가 또는 수입이 없으므로 사용할 수 없습니다. Start-Up Method의 사용은 종종 중요한 전문 지식을 갖춘 사내 인력 부족으로 인해 가능하지 않습니다. 평가를 수행합니다.

일반적인 권장 사항은 신생 기업의 경우 개발 단계의 기업과 다를 수 있습니다. 합리적인 여유를 가질 수있는 최대 확실성을 선택하고, 필요한 경우 현금 제약이있는 경우 위험을 감내하고 있습니다. 섹션 409A에 의해 작성된 요구 사항에 맞게 특별히 고안된 합리적인 가격의 평가 서비스가 현재 시장에서 제공되고 있기 때문에 일부 초기 단계의 회사조차도 독립적 인 평가 비용이 제공하는 혜택에 의해 정당화 될 수 있다고 생각할 수 있습니다. 신생 기업이 독립적 인 평가 방법을 제공 할 수없고 공식 방법이 너무 제한적이거나 부적합한 경우 나머지 옵션에는 시동 방법 및 일반 방법이 포함됩니다. 두 경우 모두 이러한 방법에 의존하려는 회사는 규정 준수 절차를 준수하기 위해 평가 절차 및 프로세스에 중점을 둘 필요가 있습니다. 모범 사례를 개발하는 데는 다음이 포함됩니다. 회사는 회사 내에 존재하는 경우 "유사한 평가를 수행하는 데 중요한 지식, 경험, 교육 또는 훈련"을받은 사람 (예 : 이사 또는 경영진)을 식별해야합니다. 시동 방법을 이용하십시오. 그러한 사람이없는 경우, 회사는 평가를 수행하는 데 가장 관련있는 기술을 가진 사람을 확인하고 추가적인 교육 또는 훈련을 통해 그 사람의 자격을 향상시킬 수 있는지 여부를 고려해야합니다. 회사 측의 이사회는 평가를 수행하기 위해 확인 된 사람 (내부 평가사)의 의견을 바탕으로 최소한 평가 요소를 포함하여 회사의 사업 및 개발 단계에 따라 평가와 관련된 요소를 결정해야합니다 일반 규칙에 지정된 회사의 내부 감정인은 회사의 보통주의 가치를 결정하는 서면 보고서를 준비하거나 지시서를 작성하고 관리해야합니다. 보고서는 평가사의 자격을 명시해야하며 모든 평가 요소 (단순히 요인이 부적합하고 그 이유는 중요하지 않음)를 논의해야하며 공정성에 관해서는 결정적인 결론을 내야합니다 (가치의 범위는 도움이되지 않습니다). 시장 가치를 평가하고 평가 요소가 가중치를 부여한 이유와 이유에 대해 논의합니다. 위에서 설명한 회사의 평가 절차는 회계사가 재무 제표에서 지원을 거부 할 평가를 결정하지 못하도록하기 위해 회계 법인과 협의하고 협의하여 수행해야합니다. 회사의 이사회는 최종 서면 보고서와 그 안에 수립 된 평가를 신중하게 검토하고 채택해야하며 스톡 옵션 부여와 관련하여 보고서에서 정한 평가를 명시해야합니다. 나중에 추가 옵션이 부여되는 경우, 이사회는 서면 보고서를 작성하는 데 사용 된 평가 요소 및 사실이 실질적으로 변경되지 않았 음을 명시 적으로 결정해야합니다. 중요한 변경 사항이 있거나 보고서 날짜 이후 12 개월이 지났 으면 보고서를 업데이트하고 새로 채택해야합니다.

중간 단계 개인 회사. 일단 회사가 초기 단계를 넘어서지만 아직 유동성 행사를 예상하지 못하면 이사회는 회사의 법률 고문 및 회계사와 협의하여 자신의 판단을 적용하여 독립적 인 평가를 받아야하는지 여부를 결정해야합니다. 회사가 그렇게해야 할 때를 대비 한 선명한 테스트는 없지만 대부분의 경우 외부 투자가가 처음으로 상당한 투자를 할 때이 단계에 도달하게됩니다. '천사'라운드는 이러한 우려를 불러 일으킬 정도로 중요 할 수 있습니다. 투자 거래의 결과로 진정으로 독립적 인 사외 이사를 얻는 이사회는 독립적 인 평가가 더 바람직하다고 결론을 내릴 수 있습니다. 실제로 벤처 캐피털 투자자는 일반적으로 외부 평가를 받기 위해 투자하는 회사를 요구합니다.

이 중간 단계의 성장 단계에있는 기업에 대한 일반적인 권장 사항은 다시 동일합니다. 합리적인 여유를 가질 수있는 최대 확실성을 선택하고, 필요한 경우 현금 제약이있는 경우 위험을 감수하고 있습니다. 중요한 수익을 창출했거나 중요한 자금 조달을 완료 한 회사는 독립적 인 평가 방법의 비용을 부담 할 능력이 더 많으며, 회사의 가치 평가가 순차적으로 결정되면 회사 및 선택 대상에 대한 책임 가능성에 대해 더 우려 할 수 있습니다 너무 낮았다. 제 409A 항에 의해 창출 된 요구에 맞게 특별히 고안된 합리적인 가격의 평가 서비스가 시장에서 제공되고 있기 때문에 중간 단계 회사는 제공되는 혜택으로 비용이 정당하다고 판단 할 가능성이 높습니다. 장래에 유동성 사건이 발생할 것으로 예상되는 회사는 빅 4 회계 법인이 아닌 경우 회계 및 재무 업무가 IPO를 위해 주문할 수 있도록보다 규모가 크고 상대적으로 정교한 지역 기업 중 하나 일 가능성이 높습니다. 취득. 그러한 많은 회사는 고객이 옵션 보조금을 위해 자신의 주식에 대한 독립적 인 평가를 요구하며 회사가 동의하지 않는 한 새로운 회계 감사를 거부하는 회계 법인에 대한보고를 듣습니다. FAS 123R에 따라 옵션 비용 징수 규정. 독립적 인 평가 방법을 구현할 때 개발 된 일반적인 관행은 초기 평가 (또는 연례 평가)를 수행 한 다음 해당 평가를 분기별로 (또는 회사의 상황에 따라 반년마다) 업데이트하고 계획을 세우는 것입니다 옵션 승인은 업데이트 직후에 발생합니다. 유일한주의 사항은 여러 기술 회사의 경우와 같이 가장 최근의 평가 이후 회사가 가치 변화 이벤트를 경험 한 경우, 회사는 해당 이벤트에 대한 감정인에게 자문을 제공해야합니다. 감정 평가는 모든 관련 정보를 통합합니다. 신중하게 검토 한 후이 단계의 회사가 독립적 인 평가 방법이 실현 가능하지 않다고 결정한 경우, 이 방법에 의존하는 모든 요구 사항이 충족 될 경우 다음 단계의 방법으로 시동 방법을 적용하거나, Up Method를 사용할 수없는 경우 일반 규칙을 적용합니다. 두 경우 모두 회사는 자사의 회계 및 법률 회사와 협의하여 사실과 상황에 따라 회사의 합리적인 평가 방법을 결정하고 최소한 Start-Up Stage Companies에 대해 위에서 설명한대로 평가를 수행해야합니다.

나중에 무대 민간 기업. & mdash; 또는 합리적으로 예상해야합니다. 180 일 이내에 대중에게 공개되거나 90 일 이내에 인수되거나 최소 10 년 이상 지속 된 사업은 시작 방법에 의존 할 수 없으며 그러한 회사는 일반 규칙에 의거 할 수 있지만 많은 의지 독립적 인 평가 방법에 크게 의존해야합니다.

독립적 인 평가 방법을 사용하여 재무 회계 목적으로 주식 가치를 확립하기 위해서는 IPO를 염두에 둔 회사가 먼저 감사원과 SEC의 규칙에 따라 필요합니다. 인수 예정인 회사는 장래 바이어가 제 409A 항을 준수 할 것에 대해 우려 할 것이며, 실사의 일부로서 방어 적 옵션 가격 결정, 일반적으로 독립적 인 평가 방법의 증거를 요구할 것입니다.

기타 관찰.

마지막으로, NQO 보조금의 경우 세이프 하버를 이용할 수없고 일반 규칙에 의거하여 결정하는 회사는 회사보다 위험을 더 많이 낳고 선택주는 409A 항의 노출을 제한 할 것을 고려할 수 있습니다. (제 409A 항을 면제하기보다는). NQO는 & quot; 409A 규격 & rdquo; 일 수 있습니다. 409A 지침에 따라 허용 된 사건 (예를 들어 통제 변경, 서비스와의 분리, 사망, 장애 및 / 또는 정의 된 특정 시간 또는 일정)에 따라 행사가 제한되는 경우 제 409A 조 지침). 그러나 옵션이 실제로 이러한 방식으로 제한되지 않는 많은 선택 대상자는 그러한 사건이 발생할 때까지 옵션을 행사하지 않지만 이러한 제한을 적용하는 것은 미묘한 방법으로 경제적 거래 또는 선택권 자의 인식을 변화시킬 수 있습니다. 인센티브 화 서비스 제공 업체에 대한 효과. 세금 및 비즈니스 관점에서 이러한 제한을 적용하는 것을 고려해야합니다.

제 409A 항에 의거하여 귀사의 평가 방식 선택을 고려할 때 도움이나 조언을 얻으려면 당사 세금 또는 기업 실무 그룹의 구성원에게 언제든지 연락하십시오. 우리는 사업 가치 평가를 수행 할 능력이 없지만 이러한 문제에 대해 많은 고객에게 조언 해 왔습니다.

1. 2004 년 10 월 22 일에 제정되고 2005 년 1 월 1 일에 발효 된 비준 무적 주식 매입 선택권을 포함하여 비영리 이연 보상 계획을 규제하는 세법.

2.이 쟁점은 다른 MBBP 세무 공지에서보다 자세하게 다루어집니다.

3. 면제가 적용되지 않는 한, 제 409A 항은 모든 & ldquo; 서비스 제공 업체를 포함합니다. & rdquo; & ldquo; employees & rdquo; 이 기사의 목적 상 & ldquo; employee & rdquo; & ldquo; 서비스 제공 업체 & rdquo; 이 용어는 제 409A 절에 정의되어 있습니다.

4.이 처리는 옵션에 '쉽게 확인할 수있는 공정한 시장 가치'가 없다면 적용됩니다. 윤리 강령 83 조와 관련 재무부 규정에 정의 된대로.

5. 제 409A 항을 제외하고, 비 자격 부여 스톡 옵션은 행사 일에 현금 또는 주식을 수령 할 수있는 권리 이외의 추가 권리를 포함해서는 안되며, 이로 인해 보상 청구가 행사 일과 & ldquo; 서비스 수신자 주식 & rdquo;과 관련하여 옵션을 발행해야합니다. 최종 규정에 정의 된대로.

6. 422 (c) (1) 항 참조.

7. ISO에만 해당됩니다. 섹션 409A까지는 NQO가 공정한 시장 가격으로 책정되어야한다는 요구 사항이 없었습니다.

8. 회사가 1 년 이내에 IPO를 신청하지 않으면 회사의 재무 제표를 재 작성할 필요가있는 값싼 주식 회계 우려가 제기되지 않는 한 SEC는 우려 할 사항이 아닙니다. 409A 항의 결과로 변경되지는 않았지만 SEC가 제재 조치를 취한 평가 방법론이 최근에 변경되었지만 모든 목적을 위해 평가 방법론이 상당히 융합 된 것으로 보입니다.

9. 국세청은 2005 년 1 월 1 일 이전, 2005 년 1 월 1 일 이후, 2007 년 4 월 17 일 이전 또는 2007 년 4 월 17 일 이전에 옵션이 부여되었는지 여부에 따라 다양한 평가 기준을 채택했다. 1 월 이전에 부여 된 옵션 2005 년 1 월 1 일부터 2005 년 12 월 31 일까지 부여 된 주식 매입 선택권은 부여 일 현재의 행사 가격을 공정 가치로보고 자 노력한 경우 공정 가치로 평가하고 있습니다. 국세청 지침은 2005 년, 2006 년 및 2007 년 4 월 17 일까지 부여 된 옵션 (최종 409A 조항의 최종 유효 기간)에 대해 행사 가격이 공정 시장보다 낮지 않도록 의도 된 경우 회사가 명시 할 수있는 경우 명시 적으로 제공합니다 가치가 합리적인 평가 방법을 사용하여 결정 되었다면, 그 가치는 섹션 409A의 요구 사항을 충족시킬 것입니다. 회사는 또한 일반 규칙 또는 세이프 하버 (Safe Harbors)에 의존 할 수 있습니다. 2007 년 4 월 17 일 이후 시작되는 옵션은 일반 규칙 또는 안전 항구를 준수해야합니다.

10. Although Section 409A does not technically apply to outright stock grants, care must be taken when establishing the value of stock grants issued proximate to the grant of options. For example, a grant of stock with a reported value for tax purposes of $0.10/share may be questioned when a subsequent grant of NQOs at a fair market value strike price of $0.15/share established using a Section 409A valuation method is made close in time.

Name/Title Direct Dial Peter N. Barnes-Brown.

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409A Aspects of Equity Compensation.

Q. 25. Are stock options subject to § 409A?

Generally not, though there is one clear area of concern. If an option is granted at a discount (i. e., the option exercise price is less than the fair market value of the underlying stock at the time of grant), the option will be subject to § 409A. The grant of a discounted option could occur for several reasons:

the discount is intentional as a way to grant more compensation; the fair market value of the underlying stock is underestimated at the time of grant; the grant occurs on a date different from the date used to determine the fair market value (a frequent issue for option backdating cases); the exercise of the option with a promissory note where the interest rate is less than the AFR; or because of a mistake or oversight.

Prior to the Final Regulations, the modification of the terms of an option could have resulted in a new “grant” of the option because the exercise price (determined on the original grant date) on the date of the modification could be less than the stock’s fair market value on the date of grant. However, unless one decreases the exercise price below the fair market value of the stock on the date of the change, or another deferral feature is added, most changes are unlikely to cause a problem under the Final Regulations. Even acceleration of the vesting of an option otherwise not subject to § 409A is not a problem despite the fact that acceleration of payment is a real problem under § 409A for other forms of deferred compensation.

Q. 26. Is an option exempt from § 409A if the underlying stock is preferred stock?

No. To qualify or § 409A exclusion, the option (or SAR) must represent the right to purchase “service recipient stock.” In general, this definition includes only common stock of the employer. Thus, preferred stock generally may not be used, although if the stock is preferred only as to voting rights or in certain other small ways, it could constitute common stock for this purpose.

Q. 27. Does it matter who issues the stock underlying a stock option?

전혀. The issuer of the stock must be the employer of the optionee or a related company. The related company must own at least 50% of the employer for whom the services are performed, or be another company up the chain (not down) where each company owns at least 50% in a chain ending with the employer. Thus, while subsidiary employees may receive options in parent company stock, the reverse is not true. The required control can be as low as 20% if there is a substantial business reason to grant options in the stock of the 20% owner. Common circumstances could involve a joint venture involving two or more businesses or certain split-off or spin transactions involving employees from each of the entities.

Q. 28. Can a venture or private equity fund grant options in portfolio companies to the equity fund employees?

This arrangement, common prior to § 409A, is unlikely to satisfy the service recipient stock issues.

Q. 29. Why is it a problem if options are subject to § 409A?

Most options permit exercise at any time after vesting (and occasionally before) through 90 or so days after termination of employment, or if earlier, expiration of the option. Only non qualified options (options which do not qualify as ISOs—“incentive stock options”) are potentially subject to § 409A (although care has to be taken if an ISO is modified or for example exceeds the ISO $100,000 limit—also, if the stock is valued too low in violation of the good faith valuation standard applicable to ISOs—the option could fail to be an ISO from the outset with the likely result that the exercise price is less than the true fair market value of the stock). This means that the year of exercise is not tied to one of the six permissible events or dates (death, disability, termination of employment, specified date, change in control or hardship), but rather is at the discretion of the optionee which will not satisfy the distribution rules of § 409A. In this instance, taxation will ccur at vesting, regardless of whether the option is exercised. Also, the optionee will be subject to an additional 20% federal tax and increased interest rates. In addition, California residents will be hit with yet an dditional 20% tax.

Q. 30. Are there circumstances in which a discounted option can avoid violating § 409A?

예. For example, occasionally in mergers, the target will be required to grant stock options in target company stock prior to the merger with an exercise price below the per share deal value. In such cases, where a gain is very likely, the option could require that a particular portion of the option be exercised within 2-1/2 months following the end of the year in which that portion vests and if not exercised by then, that portion of the option expires. Thus, the option still avoids § 409A because of the short term deferral rules. Also, the option could be written to require that it be exercised at times that would comply with § 409A. For example, the option could provide that all or a particular portion of the option be exercised, if it is exercised at all, within a specific year—this election could be made by the employee if the employee election rules of § 409A are met.

Q. 31. Does a private company need a valuation to grant stock options?

In practice the question has often been not so much why but why not get a valuation. The IRS has consistently indicated reasonable valuation methods may be applied. Thus, with sufficient effort and knowledge, in many instances a board can adequately determine a value. Indeed, the IRS offers a few “presumptions” that if applicable and if met would eliminate the need for a valuation. However, given the very high stakes, the often low cost of an appraisal and the fact that an objective appraisal is often within the range expected by the board, a significant number of companies are actually obtaining independent appraisals.

Q. 32. How often should a company have a valuation performed?

The Final Regulations generally require that determination of value be made every 12 months, though that does not necessarily mean a formal appraisal or valuation needs to be made every 12 months. There could be circumstances where an appraisal occurs and in the board’s good faith opinion, nothing has materially changed. On the other hand it could be that within a few months of an appraisal, material events occur which make the previous appraisal unreliable. Thus, while the safest course is to perform a formal appraisal every twelve months, that is neither a necessity nor a complete shield.

Q. 33. May the fair market value of a public company’s stock be determined based upon the average trading price for a specified period before or after the grant of an option?

예. The average trading price during a specified period that is within 30 days before or 30 days after the date of grant may be used to determine the fair market value of the stock subject to the option. However, an employer may use an averaging period only if the employer irrevocably commits to grant the option with an exercise price equal to such an average trading price before the beginning of the averaging period. For example, if an employer wants to grant a stock option on December 1, having an exercise price equal to the average trading price for the 30 days prior to December 1, the employer would have to irrevocably commit to grant the option with such exercise price prior to November 1.

Q. 34. Are incentive stock options (“ISOs”) subject to § 409A?

No, and this can have real significance. For example, ISOs can apply to preferred stock. While options on preferred stock will have a very difficult time complying with § 409A, if the preferred stock options are ISOs § 409A will not apply. It needs to be remembered that ISOs must have an exercise price at least equal to the fair market value of the underlying stock on the date of grant. This is similar to the requirement to avoid § 409A. However, fair market value of stock to be issued under an ISO can be determined in “good faith” rather than pursuant to a reasonable method under § 409A. This may be a distinction without a difference for the most part. It will be rare where the use of an unreasonable method could constitute a good faith determination, nonetheless, there is a distinction. Of course, if the ISO standard is not met, the option will not be an ISO, and if it has an exercise price less than the fair market value of the underlying stock on the date of grant, § 409A will apply.

Q. 35. May the exercise date of an option be extended after the date of grant?

Yes, the options may be extended for up to the original term of the option (but not more than 10 years from grant) provided the option is not otherwise subject to § 409A—and most options with an exercise price at least equal to the fair market value of the underlying stock on the date of grant are not subject to § 409A. This is a very favorable change from proposed regulations which permitted an extension for a more limited period of time. Of course there are issues with an extension. An additional financial accounting expense is likely. Also, if the option is an ISO and in the money, it will cease to be an ISO as soon as the amendment to extend is adopted. If it is not in the money at the time of an extension, the two year from grant ISO holding period would start from the date of the change.

Q. 36. May an option be modified without causing the option to be subject to § 409A?

In most cases, yes. While a modification constitutes a new grant (which can create a § 409A problem if the option is in the money at the time of the modification), the definition of a modification for § 409A purposes is very limited. Unlike the ISO rules which provide that many relatively minor changes are modifications, for § 409A purposes, only a change having the direct or indirect effect of lowering the exercise price are modifications. While this provision can be surprisingly subtle (for example changing the terms of a promissory note can result in lowering the exercise price if the interest rate is too low), for the most part common amendments to an option will not cause the option to be subject to § 409A.

Q. 37. If an option is modified to decrease the exercise price, is the repricing of an underwater option a problem?

Probably not, though there is some uncertainty under the Final Regulations. While the option may comply with the fair market value of the underlying stock at the date of the repricing, the terms of the plan could in fact create a § 409A problem because a requirement of § 409A is that the plan not permit the exercise price to go below fair market value at the date of grant. If a plan permits re-pricing (as required by Nasdaq or New York Stock Exchange rules in order to avoid obtaining shareholder approval) it is arguable that even if a repricing is never mplemented, the plan documents violate § 409A. Despite this rather hyper-technical concern, numerous repricings have occurred since the adoption of § 409A, suggesting this is not a realistic concern.

Q. 38. An option violates § 409A because it was granted at a discount to fair market value and does not have a fixed exercise date. Can it be fixed and if so, how?

Perhaps only to the extent the option is unvested. Prior to vesting a non-compliant option can be rescinded as to the unvested portion. Also, prior to January 1, 2009, various measures could have been taken though the IRS has steadfastly indicated an option may not be corrected after exercise. The most obvious fix is to raise the exercise price to the fair market value of the underlying stock as of the date of the original grant. Also, prior to vesting, the option can be structured to provide for exercise only at times that would comply with § 409A, although this can be very a tricky and perhaps an unacceptable fix.

Q. 39. Is restricted stock subject to § 409A?

Generally no, though sometimes this is a difficult determination to make. For example, if stock is actually transferred to an employee, subject to the company’s right to repurchase at cost if the employee quits prior to a certain date, § 409A does not apply. However, if there is another deferral feature, the stock could be subject to § 409A. Frequently, a restricted stock unit (“RSU”) will provide that the shares will be delivered in a tax year after vesting. In this case § 409A is likely to apply which means many things, including that the initial election (if any) to choose a distribution date would have to comply with certain election rules under § 409A and as a practical matter the distribution date will be difficult to change once elected.

Repricing underwater stock options.

The sub-prime mortgage crisis and the resulting economic downturn have significantly impacted stock prices at a large number of companies. According to a recent report by Financial Week, stock options are underwater at nearly 40 percent of the Fortune 500 companies and one in every ten companies has options that are more than 50 percent underwater.1 At the time the report was published, the Dow Jones Industrial Average was approximately 11,500. One of the most important strategic issues companies can face during a market downturn is how to address the fact that their stock option plans, which are intended to incentivize employees, have lost a critical element—incentive.

A stock option is considered to be “underwater” when its exercise price is higher than the market price of the underlying stock. There are a number of methods for addressing the problem of underwater options—each with its own benefits and drawbacks. Traditionally, the most common method has been “repricing” the options by lowering their exercise price. As discussed below, repricings now often take the form of a wide variety of different exchange programs, including programs that involve the issuance of different forms of equity compensation, such as restricted stock and restricted stock units (“RSUs”), in exchange for underwater options. What all repricings have in common, however, is the goal of reestablishing an incentive component for continued hard work and commitment, as well as restoring the retention capability of an employer’s equity compensation plan.

The last significant wave of repricings occurred in 2001 and 2002 as a result of the market downturn triggered by the collapse of internet and technology stocks. There have been significant regulatory, accounting and market practice developments as a result of lessons learned from that period. These developments resulted, in part, from a perception that some companies implemented option-repricing programs too quickly after announcing disappointing earnings followed by a subsequent drop in stock price. In addition, stock exchanges have since adopted rules requiring shareholder approval for option repricings, and institutional investors and proxy advisors, who advise shareholders on how to vote on repricing proposals, now exert a significant influence over the structuring of option repricings.

The issue of option repricings is likely to increase in importance during the last quarter of 2008 as companies consider items for inclusion in their 2009 proxy statements. If shareholder approval will be required to undertake a repricing (as is generally the case), companies with underwater options should consider now their strategy for addressing this challenge in connection with their annual meeting. Sufficient time should be allowed to obtain advice from compensation consultants, advance review of option repricing proposals by proxy advisors and requisite compensation committee and board approvals. Companies may also want to consider now how to address underwater options so that they can condition their 2009 annual grant of options (or other securities) on employees relinquishing their underwater options. This approach will not remove the need for shareholder approval (if required) and a tender offer as described below, but it will likely reduce the compensation expense associated with the annual grant and will likely result in a larger number of underwater options being canceled.

Option repricings were traditionally effected by lowering the exercise price of underwater options to the then-prevailing market price of a company’s common stock. Mechanically, this result was achieved either by amending the terms of the outstanding options or by canceling the outstanding options and issuing replacement options. The majority of repricings that occurred during the 2001 and 2002 market downturn were one-for-one option exchanges. At that time, the majority of new options had the same vesting schedule as the canceled options and only a minority of companies excluded directors and officers from repricings.2.

Two subsequent developments have made one-for-one option exchanges the exception rather than the norm:

In 2003, the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market (“Nasdaq”) adopted a requirement that public companies must seek shareholder approval of option repricings. As a result, companies must now ask (often unhappy) shareholders to provide employees with a benefit that the shareholders themselves will not enjoy. This development, coupled with the significant influence exerted on shareholder votes by institutional investors and proxy advisors, has made it almost impossible for companies to gain shareholder approval of a one-for-one option exchange due to perceived unfairness to shareholders. Prior to the effectiveness of FAS 123R, stock option grants were not accounted for as an expense on a company’s income statement. As a result, provided a company waited six months and one day, there was a limited accounting impact from a significant grant of replacement stock options, giving stock options a distinct advantage over other forms of equity compensation. FAS 123R now requires the expensing of employee stock options over the implied service term (the vesting period of the options). As a result, FAS 123R increased the accounting cost of a one-for-one option exchange and generally eliminated any accounting advantage that stock options had over other forms of equity compensation.

Companies seeking to reprice their options now often undertake a “value-for-value” exchange.3 A value-for-value exchange affords option holders the opportunity to cancel underwater options in exchange for an immediate regrant of new options at a ratio of less than one-for-one with an exercise price equal to the market price of such shares.

Value-for-value exchanges are more acceptable to shareholders and proxy advisors than one-for-one exchanges. A value-for-value exchange results in less dilution to public shareholders than a one-for-one exchange because it allows the reallocation of a smaller amount of equity to employees, which shareholders generally perceive as being fairer under the circumstances. In addition, the accounting implications of a value-for-value exchange are significantly more favorable than a one-for-one exchange. Under FAS 123R, the accounting cost of new options (amortized over their vesting period) is the fair value of those grants less the current fair value of the canceled (underwater) options. As a result, companies generally structure an option exchange so that the value of the new options for accounting purposes—based on Black-Scholes or another option pricing methodology—approximates or is less than the value of the canceled options. If the fair value of the new options exceeds the fair value of the canceled options, that incremental value is recognized over the remaining service period of the option holder.

Use of Restricted Stock or RSUs.

A common variation of the value-for-value exchange is the cancelation of all options and the grant of restricted stock or RSUs (also called phantom shares or phantom units) with the same or a lower economic value than the options canceled. Restricted stock is stock that is generally subject to a substantial risk of forfeiture at grant but will vest upon the occurrence of certain time or performance-based conditions (or both). Restricted stock is nontransferable while it is forfeitable. RSUs are economically similar to restricted stock, but involve a deferred delivery of the shares until a time that is concurrent with, or after, vesting.

The US tax rules applicable to restricted stock are different from those applicable to RSUs. Although the taxation of restricted stock is generally postponed until the property becomes vested, the grantee of restricted stock may elect to be taxed in the year of grant, rather than waiting until vesting. If this election is made pursuant to Section 83(b) of the Internal Revenue Code (“IRC”), the grantee is treated as receiving ordinary income equal to the fair market value of the underlying stock on the date of the grant. Future appreciation is taxed, as capital gain rather than as ordinary income, when the grantee disposes of the property. Because non-US jurisdictions do not generally have a provision equivalent to Section 83(b), many companies grant RSUs to their non-US employees because RSUs generally permit deferral of taxation until transfer of property under the RSU and therefore provide a similar tax consequence to restricted stock in the United States.

One benefit of both restricted stock and RSUs is that such awards ordinarily have no purchase or exercise price and provide immediate value to the grantee. Consequently, the exchange ratio will generally result in less dilution to existing stockholders than an option-for-option exchange. In addition, at a time when institutional investors and proxy advisors may advocate greater use of restricted stock and RSUs, either alone or together with stock options and Stock Appreciation Rights (SARs),4 such an exchange can be part of a shift in the overall compensation policy of a company. Finally, because restricted stock and RSUs ordinarily have no exercise price, there is no risk that they will subsequently go underwater if there is a further drop in a company’s stock price. This can be an important consideration in a volatile market.

Restricted stock and RSU grants can be structured to satisfy the performance-based compensation exception under Section 162(m) of the IRC, where applicable. Section 162(m) in general terms limits to US$1 million per year the deductibility of compensation to a public corporation’s CEO and the next top three highest-compensated officers (other than the CFO), unless an exception applies. One such exception is for performance-based compensation, which generally includes stock options. As a result, the adoption of this provision in 1993 had the unanticipated consequence of encouraging companies to use stock options instead of other forms of equity compensation.5 In addition, the rules regarding stock options under Section 162(m) are simpler than for other forms of performance-based compensation.

Repurchase of Underwater Options for Cash.

Instead of an exchange, a company may simply repurchase underwater options from employees for an amount based on Black-Scholes or another option pricing methodology. The repurchase of underwater options generally involves a cash outlay by the company, the amount of which will vary based on the extent that the shares are underwater and to the extent that such repurchase is limited to fully-vested options. Such a repurchase would reduce the number of options outstanding as a percent of the total number of common shares outstanding (referred to as the “overhang”), which is generally beneficial to a company’s capital structure.

Treatment of Directors and Officers.

Due to the guidelines of proxy advisors and the expectations of institutional investors, directors and executive officers are often excluded from participating in repricings that require shareholder approval. Nevertheless, because directors and executive officers often hold a large number of options, excluding them can undermine the goals of the repricing. As an alternative to exclusion, companies could permit directors and officers to participate on less favorable terms than other employees and could consider seeking separate shareholder approval for the participation of directors and officers in order to avoid jeopardizing the overall program. Where the method of repricing or the intention behind the implementation of a new program reflects a shift in the overall compensation policy of a company, such as the exchange of options for restricted stock or RSUs, proxy advisors and institutional investors are more likely to acquiesce in the inclusion of directors and executive officers.

The following are key terms that a company conducting a repricing will need to consider. It is advisable to retain a compensation consultant to assist with these matters and implementation of the program:

Exchange Ratio. The exchange ratio for an option exchange represents the number of options that must be tendered in exchange for one new option or other security. This must be set appropriately in order to encourage employees to participate and to satisfy shareholders. In order for a repricing to be value neutral, there will usually be a number of exchange ratios, each addressing a different range of option exercise prices.

Option Eligibility. The company must determine whether all underwater options, or only those that are significantly underwater, are eligible to be exchanged. This will depend on the volatility of the company’s stock and on the company’s expectations of future increases in share price.

New Vesting Periods. A company issuing new options in exchange for underwater options must determine whether to grant the new options based on a new vesting schedule, the old vesting schedule or a schedule that provides some accelerated vesting between these two alternatives.

NYSE and Nasdaq Requirements.

As a result of rules adopted in 2003 by the NYSE and Nasdaq requiring shareholder approval for any material amendment to an equity compensation program, a company listed on the NYSE or Nasdaq must first obtain shareholder approval of a proposed repricing unless the equity compensation plan under which the options in question were issued expressly permits the company to reprice outstanding options.6 NYSE and Nasdaq rules define a material amendment to include any change to an equity compensation plan to “permit a repricing (or decrease in exercise price) of outstanding options…[or] reduce the price at which shares or options to purchase shares may be offered.”7 A plan that does not contain a provision that specifically permits repricing of options will be considered to prohibit repricing for purposes of the NYSE and Nasdaq rules.8 Therefore, even if a plan itself is silent as to repricing, any repricing of options under that plan will be deemed to be a material revision of the plan requiring shareholder approval. In addition, shareholder approval is required before deleting or limiting a provision in a plan prohibiting the prepricing of options.9.

The NYSE and Nasdaq define a repricing as involving any of the following:10.

(i) lowering the strike price of an option after it is granted;

(ii) canceling an option at a time when its strike price exceeds the fair market value of the underlying stock, in exchange for another option, restricted stock or other equity, unless the cancelation and exchange occurs in connection with a merger, acquisition, spin-off or other similar corporate transaction; 과.

(iii) any other action that is treated as a repricing under generally accepted accounting principles.

It should be noted that neither the NYSE nor Nasdaq rules prohibit the straight repurchase of options for cash. Nasdaq has provided an interpretation stating that the repurchase of outstanding options for cash by means of a tender offer does not require shareholder approval even if an equity compensation plan does not expressly permit such a repurchase.11 In reaching this conclusion, Nasdaq noted that the consideration for the repurchase was not equity. As noted below, however, some proxy advisors may still require shareholder approval for a cash repurchase program.

Shareholder approval of a repricing will likely be required for most domestic companies listed on the NYSE or Nasdaq since they are unlikely to expressly permit a repricing. A discussion regarding the exception available to foreign private issuers is provided below.

Proxy Advisors and Institutional Investors.

Leading proxy advisors have taken a clear position on repricing provisions in equity compensation plans. The proxy advisor market is dominated by Institutional Shareholder Services (“ISS”), a division of RiskMetrics Group. Other significant proxy advisors include Glass Lewis, Egan-Jones and Proxy Governance.

While ISS and Glass Lewis each publish detailed voting guidelines related to option repricing, Egan-Jones’ voting guidelines state that it will consider repricing proposals on a case-by-case basis without enumerating its considerations. Proxy Governance considers all matters on a case-by-case basis and does not publish voting guidelines.

ISS and Glass Lewis both expressly state in their proxy voting guidelines that they will recommend that shareholders vote against any equity compensation plan that permits repricing without a shareholder vote.12 ISS’s 2008 US Proxy Voting Guidelines further state that ISS will recommend that shareholders vote against or withhold their vote from members of a company’s compensation committee if that company repriced underwater options for stock, cash or other consideration without prior shareholder approval, even if such a repricing is permitted under the company’s equity compensation plan. Against this background, it is likely that most companies will seek shareholder approval for a repricing even if it is not required under their equity compensation plans.

In February 2007, ISS updated its guidance regarding repricings, stating that it would recommend a vote in favor of a management proposal to reprice options on a case-by-case basis taking into consideration the following factors:13.

Historic trading patterns—the stock price should not be so volatile that the options are likely to be back “in-the-money” over the near term. Rationale for the repricing—was the stock price decline beyond management’s control? Type of exchange—is this a value-for-value exchange? Burn rate—are surrendered stock options added back to the plan reserve? Option vesting—do the new options vest immediately or is there a black-out period? Term of the option—does the term remain the same as that of the replaced option? Exercise price—is the exercise price set at fair market or a premium to market? Participants—executive officers and directors should be excluded.

As part of its update, ISS stated that it would evaluate the “intent, rationale and timing” of the repricing proposal, noting that it would consider the repricing of options after a recent precipitous drop in a company’s stock price to be poor timing. ISS also noted that the decline in stock price should not have occurred within the year immediately prior to the repricing and that the grant dates of the surrendered options should be far enough back (two to three years) so as not to suggest that repricings were being commenced to take advantage of short-term downward price movements. Finally, ISS requires that the exercise price of the surrendered options be above the 52-week high for the stock price.

Glass Lewis states in its guidelines that it will recommend a vote in favor of a repricing proposal on a case-by-case basis if:

Officers and board members do not participate in the repricing. The stock decline mirrors the market or industry price decline in terms of timing and approximates the decline in magnitude. The repricing is value neutral or value creative to shareholders with very conservative assumptions and a recognition of the adverse selection problems inherent in voluntary programs. Management and the board make a cogent case for needing to incentivize and retain existing employees, such as being in a competitive employment market.

Treatment of Canceled Options.

Upon the occurrence of a repricing, equity compensation plans generally provide for one of two alternatives: (i) the shares underlying repriced options are returned to the plan and used for future issuances or (ii) such shares are redeemed by the company and canceled, so as to no longer be available for future grants. A company’s equity compensation plan should make clear which alternative it will use. In the case of an option repricing that results in the return of canceled shares to a company’s equity incentive plan, ISS considers whether the issuer’s three-year average burn rate is acceptable in determining whether to recommend that shareholders approve the repricing.14.

Proxy Solicitation Methodology.

Companies seeking shareholder approval for a repricing face a number of hurdles, not the least the fact that shareholders have suffered from the same decrease in share price that caused the options to fall underwater. It should also be noted that brokers are prohibited from exercising discretionary voting power (i. e., to vote without instructions from the beneficial owner of a security) with respect to implementation of, or a material revision to, an equity compensation plan.15 Therefore, the need to convince shareholders of the merits of a repricing is magnified, as is the influence of proxy advisors.

The solicitation of proxies from shareholders by a domestic reporting company is governed by Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules thereunder. Item 10 of Schedule 14A contains the basic disclosure requirements for a proxy statement used by a domestic issuer to solicit approval of a repricing. Pursuant to these requirements and common practice, issuers generally include the following items of disclosure:

A description of the option exchange program, including a description of who is eligible to participate, the securities subject to the exchange offer, the exchange ratio and the terms of the new securities. A table disclosing the benefits or amounts, if determinable, that will be received by or allocated to (i) named executive officers, (ii) all current executive officers as a group, (iii) all current directors who are not executive officers as a group and (iv) all employees, including all current officers who are not executive officers, as a group. A description of the reasons for undertaking the exchange program and any alternatives considered by the board. The accounting treatment of the new securities to be granted and the US federal income tax consequences.

It is important that companies ensure that their disclosure includes a clear rationale for the repricing in order to satisfy the disclosure requirements sought by proxy advisors and necessary to persuade shareholders to vote in favor of the repricing.16.

Rule 14a-6 under the Exchange Act permits a company that is soliciting proxies solely for certain specified limited purposes in connection with its annual meeting (or a special meeting in lieu of an annual meeting) to file a definitive proxy statement with the SEC and commence its solicitation immediately. The alternative requirement would be to file a preliminary proxy statement first and wait ten days while the SEC determines if it will review and comment on the proxy statement. While there is some room for interpretation, we believe that the better position is that a proxy statement containing a repricing proposal should generally be filed with the SEC in preliminary form and then in definitive form after ten days if there is no SEC review. This is because the purposes for which a proxy statement can be initially filed in definitive form are limited to the following solely in connection with an annual meeting: (i) the election of directors, (ii) the election, approval or ratification of accountants, (iii) a security holder proposal included pursuant to Rule 14a-8 and (iv) the approval, ratification or amendment of a “plan.” “Plan” is defined in Item 401(a)(6)(ii) of Regulation S-K as “any plan, contract, authorization or arrangement, whether or not set forth in any formal document, pursuant to which cash, securities, similar instruments, or any other property may be received.” Most repricing proposals could be viewed as seeking approval of an amendment to a company’s plan to permit the repricing and approval of the terms of the repricing itself. The better interpretation seems to be that approval of the terms of a particular repricing is separate from an amendment to the plan to permit repricing since the repricing terms would generally still be submitted for shareholder approval due to proxy advisor requirements even if the plan permitted repricing. Accordingly, companies should initially file proxy statements for a repricing in preliminary form.

Application of the Tender Offer Rules.

US tender offer rules are generally implicated when the holder of a security is required to make an investment decision with respect to the purchase, modification or exchange of that security. One might question why a unilateral reduction in the exercise price of an option would implicate the tender offer rules since there is no investment decision involved by the optionholder. Indeed, many equity incentive plans permit a unilateral reduction in the exercise price of outstanding options, subject to shareholder approval, without obtaining the consent of optionholders on the basis that such a change is beneficial to them. In reality, however, the likelihood of a domestic company being able to conduct a repricing without implicating the tender offer rules is minimal for the following reasons:

Because of the influence of proxy advisors and institutional shareholders, most option repricings involve a value-for-value exchange consisting of more than a mere reduction in exercise price. A value-for-value exchange requires a decision by optionholders to accept fewer options or to exchange existing options for restricted stock or RSUs. This is an investment decision requiring the solicitation and consent of individual optionholders. A reduction in the exercise price of an Incentive Stock Option (“ISO”) would be considered a “modification” akin to a new grant under applicable tax laws.17 The new grant of an ISO restarts the holding periods required for beneficial tax treatment of shares purchased upon exercise of the ISO. The holding periods require that the stock purchased under an ISO be held for at least two years following the grant date, and one year following the exercise date, of the option. The resulting investment decision makes it difficult in practice to effect a repricing that includes ISOs without seeking the consent of ISO holders since they must decide if the benefits of the repricing outweigh the burdens of the new holding periods.

The SEC staff has suggested that a limited option repricing/ exchange with a small number of executive officers would not be a tender offer. In such an instance, the staff position is that an exchange offer to a small group is generally seen as equivalent to individually-negotiated offers, and thus not a tender offer. Such an offer, in many respects, would be similar to a private placement. The SEC staff believes that the more sophisticated the optionholders, the more the repricing/exchange looks like a series of negotiated transactions. However, the SEC staff has not provided guidance on a specific number of offerees so this remains a facts and circumstances analysis based on both the number of participants, and their positions and sophistication.18.

Not all equity incentive plans involve the issuance ISOs and thus the attendant ISO-related complexities will not always apply. As a result, foreign private issuers and domestic companies that have not granted ISOs and are simply reducing the exercise price of outstanding options unilaterally may also be able to avoid the application of the US tender offer rules. Foreign private issuers are discussed in more detail below.

Requirements of the US Tender Offer Rules.

The SEC views a repricing of options that requires the consent of the optionholders as a “self tender offer” by the issuer of the options. Self tender offers by companies with a class of securities registered under the Exchange Act are governed by Rule 13e-4 thereunder, which contains a series of rules designed to protect the interests of the targets of the tender offer. While Rule 13e-4 applies only to public companies, Regulation 14E applies to all tender offers. Regulation 14E is a set of rules prohibiting certain practices in connection with tender offers and requiring, among other things, that a tender offer remain open for at least 20 business days.

In March 2001, the SEC issued an exemptive order providing relief from certain tender offer rules that the SEC considered onerous and unnecessary in the context of an option repricing.19 Specifically, the SEC provided relief from complying with the “all holders” and “best price” requirements of Rule 13e-4. As a result of this relief, issuers are permitted to reprice/exchange options for selected employees. Among other things, this exception allows issuers to exclude directors and officers from repricings. Furthermore, issuers are not required to provide each optionholder with the highest consideration provided to other optionholders.20.

Pre-commencement offers . The tender offer rules regulate the communications that a company may make in connection with a tender offer. These rules apply to communications made before the launch of a tender offer and during its pendency. Pursuant to these rules, a company may publicly distribute information concerning a contemplated repricing before it formally launches the related tender offer, provided that the distributed information does not contain a transmittal form for tendering options or a statement of how such form may be obtained. Two common examples of company communications that fall within these rules are the proxy statement seeking shareholder approval for a repricing and communications between the company and its employees at the time that proxy statement is filed with the SEC. Each such communication is required to be filed with the SEC under cover of a Schedule TO with the appropriate box checked indicating that the content of the filing includes pre-commencement written communications.

Tender offer documentation . An issuer conducting an option exchange will be required to prepare the following documents:

Offer to exchange, which is the document pursuant to which the offer is made to the company’s optionholders and which must contain the information required to be included therein under the tender offer rules. Letter of transmittal, which is used by the optionholders to tender their securities in the tender offer. Other ancillary documents, such as the forms of communications with optionholders that the company intends to use and letters for use by optionholders to withdraw a prior election to participate.

The documents listed above are filed with the SEC as exhibits to a Schedule TO Tender Offer Statement.

The offer to exchange is the primary disclosure document for the repricing offer and, in addition to the information required to be included by Schedule TO, focuses on informing securityholders about the benefits and risks associated with the repricing offer. The offer to exchange is required to contain a Summary Term Sheet that provides general information—often in the form of frequently asked questions—regarding the repricing offer, including its purpose, eligibility of participation, duration and how to participate. It is also common practice for a company to include risk factors disclosing economic, tax and other risks associated with the exchange offer. The most comprehensive section of the offer to exchange is the section describing the terms of the offer, including the purpose, background, material terms and conditions, eligibility to participate, duration, information on the stock or other applicable units, interest of directors and officers with respect to the applicable units or transaction, procedures for participation, tax consequences, legal matters, fees and other information material to the decision of a securityholder when determining whether or not to participate in such offer.

The offer to exchange, taken as a whole, should provide comprehensive information regarding the securities currently held and those being offered in the exchange—including the difference in the rights and potential values of each. The disclosure of the rights and value of the securities is often supplemented by a presentation of the market price of the underlying stock to which the options pertain, including historical price ranges and fluctuations, such as the quarterly highs and lows for the previous three years. The offer to exchange may also contain hypothetical scenarios showing the potential value risks/benefits of participating in the exchange offer. These hypothetical scenarios illustrate the approximate value of the securities held and those offered in the exchange at a certain point in the future assuming a range of different prices for the underlying stock. If the repricing is part of an overall shift in a company’s compensation plan, the company should include a brief explanation of its new compensation policy.

Launch of the repricing offer . The offer to exchange is transmitted to employees after the Schedule TO has been filed with the SEC. While the offer is pending, the Schedule TO and all of the exhibits thereto (principally the offer to exchange) may be reviewed by the SEC staff who may provide comments to the company, usually within five to seven days of the filing. The SEC’s comments must be addressed by the company to the satisfaction of the SEC, which usually requires the filing of an amendment to the Schedule TO, including amendments to the offer to exchange. Generally, no distribution of such amendment (or any amendments to the offer to exchange) will be required.21 This review usually does not delay the tender offer and generally will not add to the period that it must remain open.

Under the tender offer rules, the tender offer must remain open for a minimum of 20 business days from the date that it is first published or disseminated. For the reasons noted below, most option repricing exchange offers are open for less than 30 calendar days. If the consideration offered or the percentage of securities sought is increased or decreased, the offer must remain open for at least ten business days from the date such increase or decrease is first published or disseminated. The SEC also takes the position that if certain material changes are made to the offer (e. g., the waiver of a condition), the tender offer must remain open for at least five business days thereafter.22 At the conclusion of the exchange period, the repriced options, restricted stock or RSUs will be issued pursuant to the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”) for the exchange of securities issued by the same issuer for no consideration.

Conclusion of the repricing offer . The company is required to file a final amendment to the Schedule TO setting forth the number of optionholders who accepted the offer to exchange.

Certain Other Considerations.

If the repricing offer is open for more than 30 days with respect to options intended to qualify for ISO treatment under US tax laws, those incentive stock options are considered newly granted on the date the offer was made, whether or not the optionholder accepts the offer.23 If the period is 30 days or less, then only ISO holders who accept the offer will be deemed to receive a new grant of ISOs.24 As discussed above, the consequence of a new grant of ISOs is restarting the holding period required to obtain beneficial tax treatment for shares purchased upon exercise of the ISO.25 As a result of these requirements, repricing offers involving ISO holders should generally be open for no more than 30 days.

In order to qualify for ISO treatment, the maximum fair market value of stock with respect to which ISOs may first become exercisable in any one year is $100,000. For purposes of applying this dollar limitation, the stock is valued when the option is granted, and options are taken into account in the order in which granted. Whenever an ISO is canceled pursuant to a repricing, any options, any shares scheduled to become exercisable in the calendar year of the cancelation would continue to count against the US$100,000 limit for that year, even if cancelation occurs before the shares actually become exercisable.26 To the extent that the new ISO becomes exercisable in the same calendar year as the cancelation, this reduces the number of shares that can receive ISO treatment (because the latest grants are the first to be disqualified).27 Where the new ISO does not start vesting until the next calendar year, however, this will not be a concern.

If the repricing occurs with respect to nonqualified stock options, such options need to be structured so as to be exempt from (or in compliance with) Section 409A of the IRC. Section 409A, effective in January 2005, comprehensively codifies for the first time the federal income taxation of nonqualified deferred compensation. Section 409A generally provides that unless a “nonqualified deferred compensation plan” complies with various rules regarding the timing of deferrals and distributions, all amounts deferred under the plan for the current year and all previous years become immediately taxable, and subject to a 20 percent penalty tax and additional interest, to the extent the compensation is not subject to a “substantial risk of forfeiture” and has not previously been included in gross income. While at one time the feasibility of option repricing under Section 409A was in doubt, the final regulations clarify that a reduction in price that is not below the fair market of the underlying stock value on the date of the repricing should not cause the option to become subject to Section 409A. Instead, such repricing of an underwater option is treated as the award of a new stock option that is exempt from Section 409A.28.

It should also be noted that a repriced option will be considered regranted for purposes of the performance-based compensation exception to the US$1 million limitation under Section 162(m) of the IRC on deductions for compensation to certain named executive officers and will again count against any per-person grant limitations in the plan intended to satisfy the rules governing the exception.29.

Accounting considerations are a significant factor in structuring a repricing. Prior to the adoption of FAS 123R in 2005, companies often structured repricings with a six-month hiatus between the cancelation of underwater options and the grant of replacement options. The purpose of this structure was to avoid the impact of variable mark-to-market charges. Under FAS 123R, however, the charge for the new options is not only fixed upfront, but is for only the incremental value, if any, of the new options over the canceled options. As discussed above, in a value-for-value exchange, a fewer number of options or shares of restricted stock or RSUs will usually be granted in consideration for the surrendered options. As a result, the issuance of the new options or other securities can be a neutral event from an accounting expense perspective.

The replacement of an outstanding option with a new option having a different exercise price and a different expiration date involves a disposition of the outstanding option and an acquisition of the replacement option, both of which are subject to reporting under Section 16(a). However, the disposition of the outstanding option will be exempt from short-swing profit liability under Section 16(b) pursuant to Rule 16b-3(e) if the terms of the exchange are approved in advance by the issuer’s board of directors, a committee of two or more non-employee directors, or the issuer’s shareholders. It is generally not a problem to satisfy these requirements. Similarly, the grant of the replacement option or other securities is subject to reporting, but will be exempt from short-swing profit liability pursuant to Rule 16b-3(d) if the grant was approved in advance by the board of directors or a committee composed solely of two or more non-employee directors, or was approved in advance or ratified by the issuer’s shareholders no later than the date of the issuer’s next annual meeting, or is held for at least six months.

Relief from Shareholder Approval Requirement.

Both the NYSE and Nasdaq provide foreign private issuers with relief from the requirement of stockholder approval for a material revision to an equity compensation plan by allowing them instead to follow their applicable home country practices. As a result, if the home country practices of a foreign private issuer do not require shareholder approval for a repricing, the foreign private issuer is not required to seek shareholder approval under NYSE or Nasdaq rules.

Both the NYSE and Nasdaq require an issuer following its home country practices to disclose in its annual report on Form 20-F an explanation of the significant ways in which its home country practices differ from those applicable to a US domestic company. The disclosure can also be included on the issuer’s website in which case, under NYSE rules, the issuer must provide the web address in its annual report where the information can be obtained. Under Nasdaq rules, the issuer is required to submit to Nasdaq a written statement from independent counsel in its home country certifying that the issuer’s practices are not prohibited by the home country’s laws.

A number of foreign private issuers have disclosed that they will follow their home country practices with respect to a range of corporate governance matters, including the requirement of shareholder approval for the adoption or any material revision to an equity compensation plan. These companies are not subject to the requirement of obtaining shareholder approval. Companies that have not provided such disclosure and wish to avoid the shareholder approval requirements when undertaking a repricing will need to consider carefully their historic disclosure and whether such an opt-out poses any risk of a claim from shareholders.

Relief from US Tender Offer Rules.

Foreign private issuers also have significant relief from the application of US tender offer rules if US optionholders hold ten percent or less of the options that are subject to the repricing offer. For purposes of calculating the percentage of US holders, the issuer is required to exclude from the calculation options held by any person who holds more than ten percent of such issuer’s outstanding options. Under the exemption, the issuer would be required to take the following steps:

(i) File with the SEC under the cover of a “Form CB” a copy of the informational documents that it sends to its optionholders. This informational document would be governed by the laws of the issuer’s home country and would generally consist of a letter to each optionholder explaining why the repricing is taking place, the choices each optionholder has and the implications of each of the choices provided.

(ii) Appoint an agent for service of process in the United States by filing a “Form F-X” with the SEC.

(iii) Provide each US optionholder with terms that are at least as favorable as those terms offered to optionholders in the issuer’s home country.

A more limited exemption to the US tender offer rules also exists for foreign private issuers in instances where US investors hold 40 percent or less of the options that are subject to the repricing. Under this exception, both US and non-US securityholders must receive identical consideration. The minimal relief is intended merely to minimize the conflicts between US tender offer rules and foreign regulatory requirements.

In recent years, Microsoft and Google have used innovative methods to address the issue of underwater employee stock options, providing a viable alternative to repricing.

In 2007, Google implemented an ongoing program that affords its optionholders (excluding directors and officers) the ability to transfer outstanding options to a financial institution through a competitive online bidding process managed by Morgan Stanley. The bidding process effectively creates a secondary market in which employees can view what certain designated financial institutions and institutional investors are willing to pay for vested options. The value of the options is therefore a combination of their intrinsic value (i. e., any spread) at the time of sale plus the “time value” of the remaining period during which the options can be exercised (limited to a maximum of two years in the hands of the purchaser). As a result of this “combined” value, Google expects that underwater options will still retain some value. This expectation is supported by the fact that in-the-money options have been sold at a premium to their intrinsic value. Google’s equity incentive plan was drafted sufficiently broadly to enable options to be transferable without the need to obtain shareholder approval to amend the plan. It is likely, however, that most other companies’ plans limit transferability of options to family members. Accordingly, most companies seeking to implement a similar transferable option program will likely need to obtain shareholder approval in order to do so. Finally, it should be noted that ISOs become non-qualified stock options if transferred. The only options Google granted following its IPO were non-qualified stock options and, accordingly, the issue of losing ISO status did not arise.

In 2003, Microsoft implemented a program that afforded employees holding underwater stock options a one-time opportunity to transfer their options to JPMorgan in exchange for cash.30 The program was implemented at the same time that Microsoft started granting restricted stock instead of options and was open on a voluntary basis to all holders of vested and unvested options with an exercise price of US$33 or more (at the time of the implementation of the program, the company’s stock traded at US$26.5). Employees were given a one-month election period to participate in the program, and once an employee chose to participate, all of that employee’s eligible options were required to be tendered. Employees who transferred options were given a cash payment in installments dependent upon their continued service with Microsoft.

The methods used by Google and Microsoft raise a number of tax and accounting questions and require the filing of a registration statement under the Securities Act in connection with short sales made by the purchasers of the options to hedge their exposure. To date, these methods have not been adopted by other companies; however, some larger companies with significant amounts of outstanding, underwater options may want to consider them and investment banks may show renewed interest in offering such programs. Nevertheless, it is likely that most companies will continue to conduct more conventional repricings in order to address underwater options.

In the face of the recent market downturn, and drawing on lessons learned from the 2001 – 2002 decline in Internet and technology stocks, companies should consider whether they need to address their underwater stock options. A small number of companies have already effected repricings in 2008. With stock prices continuing to be depressed, the last quarter of 2008 is an appropriate time to consider whether to take steps to retain and reincentivize employees. For those companies with a calendar fiscal year, it is the appropriate time to consider whether to seek shareholder approval for a repricing in connection with the company’s 2009 annual meeting.