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Implementing an Auto Exercise Program for Stock Options

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June 27, 2019 | Jennifer Namazi

Implementing an Auto Exercise Program for Stock Options

Companies that grant stock options know that there are a few core challenges that have maintained their existence throughout the life span of these types of arrangements. Among them: how to handle the impending expiration of an in-the-money, unexercised grant.
 
There is one solution to this dilemma that, although a viable concept for years, still appears to be underutilized. That is the execution of an automatic exercise: if an in-the-money stock option remains outstanding just prior to expiration, it is automatically exercised by the company in order to avoid cancellation. It seems surprising that although the notion of an automatic exercise has been around for years, few companies have actually adopted the practice.
 
It’s time to dust off the discussion on automatic exercise and identify ways that companies can ease into implementing an automatic expiration program. Companies who are considering implementing auto exercise, or are already in the process of doing so, may benefit from the following administrative considerations.
 
What are the Metrics?
 
How many in-the-money stock options actually expire unexercised? This may be a key question asked in internal discussions about whether or not to implement this type of program. While there is no answer that would make such a program a hard yes or no decision (it may be favorable to implement this type of program even if no in-the-money options have expired in the past), administrators in companies considering this practice should familiarize themselves with the plan’s history. Keep in mind that even one employee lawsuit can be taxing on time and resources, so even without a history of multiple in-the-money expiration, such a program could still add value.
 
Update Grant Agreements
 
If the company does adopt an auto exercise program, it would be wise to update grant agreements to reflect this eventuality.  This is an area where legal counsel should be consulted, particularly in considering and documenting some of the rights the company has with respect to the program, like the ability to discontinue it down the road.
 
Handling Employee Objections
 
It’s unlikely that most employees will protest the idea of a potential automatic exercise at the time of grant, when they first receive their grant agreements. It seems almost equally unlikely that employees who actually have an automatic exercise trigger on their behalf would complain about the fact that their in-the-money options did not expire unexercised. However, if such a situation arises, the type of auto exercise used may determine the ease of unwinding such a transaction. For example, it is possible to unwind a net issuance exercise in the same calendar year. Considering that no market transaction would have taken place, this would be fairly straightforward relative to correcting other forms of exercise.  
 
Save Time and Resources on Outreach
 
Most companies with stock options have some form of outreach process targeted to optionees with upcoming option expirations. These efforts can involve phone calls, emails, letters and other forms of tracking someone down. A case certainly can be made that implementing an automatic exercise program would eliminate most of these activities for stock plan administrators. Many third party vendors have some form of capability to support auto exercise.
 
Getting a Seat at the Table
 
Administrators at companies who are considering this practice should advocate for their place at the decision table. At minimum, stock plan professionals will want to be heard on the history of activity, the issue of net exercise, and on decision points like whether or not to update existing grant agreements.  In addition, companies that haven’t yet considered auto exercise may want to bring the discussion to the table the next time a plan amendment or adoption of a new plan is considered.
 
Automatic exercise is a viable means to address this age-old problem of expiring stock options. It’s time for issuers and stock plan professionals to take a serious look at implementing this type of program.

-Jennifer
 
 

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