• Stock Option Exchange Programs: One Approach to Addressing "Underwater" Stock Options
  • December 14, 2009
  • Law Firm: Harter Secrest & Emery LLP - Rochester Office
  • Many publicly traded companies use equity compensation to motivate and retain their top-performing employees and to align the interests of employees with those of shareholders. Due to the increasing prevalence of equity compensation as a core compensation component and the recent broad based, global economic downturn, many employees are currently holding "underwater" stock options (options whose exercise price is above the current fair market value of the underlying stock). Stock options that are significantly underwater offer limited incentive and retentive value because employees are unable to envision how their underwater stock options will ever become valuable. A stock option exchange program may provide a company with a solution to these issues. However, there are significant legal, accounting, tax and U.S. Securities and Exchange Commission ("SEC") requirements, as well as shareholder considerations, involved in designing and implementing such an exchange program.