Stock options are often a significant, and critical, component of a public company’s compensation and benefits programs as they align the interests of employees and stockholders—when the company’s stock price increases, option holders and stockholders alike benefit. When a company’s stock price falls below the exercise price of outstanding options (that is, when the options become “underwater”), the incentive value of the options is reduced and, if the stock price falls significantly and/ or experiences a sustained decline, the incentive value can be all but eliminated. When options have been underwater for a prolonged period of time, public companies invariably consider a variety of ways to restore that lost value, including by “repricing” the options.
The term “repricing” can be effected with several different types of structures, ranging from a straightforward reduction in the exercise price of an outstanding option to the exchange of the option for a different type of equity award and/or a cash payment. For a public company, whether to pursue a repricing and the structure of any repricing that is pursued will be informed by a number of compensation, governance, legal, accounting, tax and investor relations considerations. In this alert, we provide an in-depth discussion of the key considerations that are relevant to any option repricing program (the highlights of which are provided in the box below), a summary of common repricing structures (including advantages and disadvantages of those structures), and a discussion of the approval and implementation process for a repricing.
