Repricing Options Gaining Momentum

After the dot-com bust, many companies decided to reprice their deeply underwater stock options, often more than once. At the time, unless companies delayed the choice to accept repriced options for six months or more, they had to show the cost of options on their income statement, something they did not have to do before. New accounting rules price options at grant, so there is not an automatic additional accounting charge to repricing, although there could be an additional charge if more value is added. In a common approach, companies offer to cancel existing options and exchange them for new options at a lower price. There are fewer new options offered, however, so that the net effect is value neutral, thus incurring no additional expensing requirement. Employees will generally see this as a positive development, even if they are getting fewer options, given that their current options have little chance of being worth anything.

While the accounting issues are less problematic than before, shareholder approval problems are moreso. Repricing generally requires shareholder approval and securities law compliance. Institutional advisors take a dim view of repricing. If they do support it, they almost always do so only if repricing does not apply to executives. There are also a number of more specific guidelines about pricing and terms that can make the changes difficult. The next issue of our newsletter will provide more details on these issues.

A story in the Wall Street Journal (11/10/2008) discusses these recent trends.