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Stock Option Repricing: When You Are Underwater Part 2

Fulcrum Partners Executive Benefits News

Today we’re sharing Part 2 of an article written by Mike Melbinger on the timely and challenging matter of stock option repricing. Mike is a Partner in the Chicago Office of Winston & Strawn LLP. His law practice focuses exclusively on executive compensation and employee retirement benefit issues. Use this link to catch up, if you missed Part 1 yesterday of “Stock Option Repricing: When You Are Underwater.”

Follow-Up on Potential Alternative to Repricing Underwater Stock Options (Part 2) 

(first published May 6, 2020)

A couple weeks ago, I wrote on SEC approval of the New York Stock Exchange’s request to provide temporary waivers of the shareholder approval requirements applicable to certain kinds of equity sales to officers and directors, see A Potential Alternative to Repricing Underwater Stock Options. This week, the SEC approved a similar request by Nasdaq.

Similar to the NYSE, Nasdaq Listing Rule 5635(c) requires shareholder approval for certain sales to officers, directors, employees, or consultants (affiliates) when such issuances could be considered a form of “equity compensation.” In light of many companies’ need to quickly raise capital during the pandemic, the SEC approved Nasdaq’s proposal to adopt Listing Rule 5636T(c)1, which would provide for an exception from shareholder approval under Listing Rule 5635(c)2 for an affiliate’s participation in a capital-raising transaction alongside non-affiliated investors. Unlike the NYSE rule, however, this exception will only apply if the affiliate’s participation in the transaction was specifically required by unaffiliated investors.

In addition, to protect against self-dealing, under the exception, an affiliate investing in the transaction must not have participated in negotiating the economic terms of the transaction, any affiliate’s participation must be less than 5% of the transaction, and all affiliates’ participation collectively must be less than 10% of the transaction.

To rely on this exception, a company must execute a binding agreement governing the issuance of the securities and submit certain notices no later than June 30, 2020. The company also must file a Form 8-K3 describing the transaction, but is not required to notify Nasdaq at least 15 calendar days in advance of the transaction, as normally would be required by Listing Rule 5250(e)(2)4.

References:

  1. https://www.sec.gov/rules/sro/nasdaq/2020/34-88805.pdf
  2. https://listingcenter.nasdaq.com/
  3. https://www.sec.gov/files/form8-k.pdf
  4. http://nasdaq.cchwallstreet.com/NASDAQTools/

Additional Insights 

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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through CapAcuity, LLC; Lion Street Advisors, LLC (LSF) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI, LSF and BDO Alliance USA are non-affiliated entities and separate entities from Fulcrum Partners and CapAcuity, LLC.

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