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ISS Issues Policy on Repricings and Option Exchanges

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April 21, 2020 | Barbara Baksa

ISS Issues Policy on Repricings and Option Exchanges

ISS has issued policy guidance on various issues related to COVID-19, including modifications of compensation arrangements. With respect to equity awards, the guidance focuses on two actions that companies might take: repricing stock options and modifying performance awards. For this week's blog entry, I look at ISS's guidance on repricing stock options. Next week, I'll discuss the guidance on performance awards. 

What Exactly Are We Talking About? 

There are many ways to restore value to underwater options. You can modify the option to reduce the exercise price, you can cancel the underwater option and grant a new at-the-money option, you can cancel the option and grant a restricted stock/unit award instead, you can cancel the option and give the employee a cash payout, you can buyout the options for cash, or you can call the whole thing an "exchange"—ISS uses the term "repricing actions" to refer to all of these things and it takes the same view of all of them (and, indeed, some of them are just different ways of referring to the same action).

Why Does ISS Have a Say On Repricings?

Option repricings or exchanges generally are subject to shareholder approval under the NYSE and Nasdaq listing requirements (with the possible exception of exchanges for cash), unless the plan explicitly permits these modifications to be made without shareholder approval. Shareholders of public companies rarely approve plans that allow repricing actions without their approval; this is a dealbreaker provision in ISS's Equity Plan Scorecard, meaning ISS automatically recommends against the plan. All of which is to say that most repricing actions are subject to shareholder approval. And if you need shareholder approval, it will generally be easier to obtain if you have a favorable recommendation from ISS.

Will ISS Give a Favorable Recommendation to Repricing Actions?

Maybe, but probably not this year. ISS will recommend in favor of a repricing but only if specified conditions are met. Most significantly:

ISS will generally recommend opposing any repricing that occurs within one year of a precipitous drop in the company's stock price.

Thus, ISS is likely to recommend against any repricing proposals at 2020 shareholder meetings that are in response to the recent market decline.

The other conditions to obtain a favorable recommendation from ISS are:
  • The repricing/exchange has to be on a value-for-value basis. The number of shares in the repriced options must be reduced such that their current aggregate fair value is equal to that of the underwater options.
  • The surrendered/cancelled options are not added back to the plan reserve.
  • The repriced options do not vest immediately.
  • Executive officers and directors are excluded.
If the company is in the lucky position of having the ability to reprice options without seeking shareholder approval, ISS notes that doing so will cause the directors to be subject to scrutiny under current ISS policies. Here again, this could result in other unfavorable recommendations (Say-on-Pay, future stock plan proposals, director elections).

Keep Up with Current Developments

Don’t miss this Wednesday’s webcast, Virus, Volatility and Variables, for an in-depth look at the latest emerging issues affecting stock plans. And check out our COVID-19 Resources for help with all your questions on the impact COVID-19 is having on equity compensation. Stay safe and wash your hands!

- Barbara

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