May 11, 2020
Nuts & Bolts of Option Repricing Programs
– Lynn Jokela
With the current market downturn, I’ve blogged a few times about option repricing and exchange programs as companies take these programs into consideration. As I’ve said before, it’s hard to say how many companies will decide to do so because of, among other things, considerations about proxy advisor and institutional investor views. For a nuts & bolts understanding about how these programs work, Pay Governance issued a helpful memo.
The memo steps through an example of a voluntary exchange of underwater options for new option grants. In addition to explaining the mechanics of calculating the number of options to exchange for underwater options, the memo discusses disclosure implications, views of proxy advisors and institutional investors and then provides analysis to help answer the question of how far underwater options should be to consider the viability of a stock option exchange program.
Ultimately, the firm says that there are no definitive answers that apply in all situations but also explains there is a meaningful relationship between the percentage stock price decline, remaining option term, and the likelihood of options finishing the term “in the money.” The threshold for considering an exchange depends on the likelihood of finishing in the money without intervention.