Many Companies Avoid Votes on Repricing - 26 Jan 2009

Monday, January 26, 2009

Many Companies Avoid Votes on Repricing
Submitted by: Ryan Thomas and Stephen Farr, U.S. Research Analysts

As
2009 unfolds, many compensation committees at U.S. companies are
debating whether and how to address the problem of “underwater” stock
options.

Option repricing becomes an issue whenever a company experiences a
decline in share price, such as that which has occurred at many issuers
over the past year, leaving a large number of outstanding option grants
with exercise prices higher than current market prices for the
underlying shares. Companies argue that these underwater grants cause
morale problems and lose their incentive value if employees do not
foresee the stock price recovering, especially when the price decline
was precipitated by external events perceived to be unrelated to
management’s performance. Technology-focused firms, many of which grant
options broadly to their employees, tend to argue this point most
vocally.

However, a substantial number of issuers do not seek shareholder
approval before repricing options. According to a RiskMetrics Group
report on the information technology, media, and telecommunications
(TMT) sector to be released next week, 19 companies—45 percent of the
firms studied—did not ask for investor approval. That group included
nine technology firms.

Another 22 companies (with 10 in the technology sector) did put
option exchange programs on the ballot in 2008. This year, at least
seven firms so far have sought shareholder approval. Repricing
proposals are on the ballot at Advanced Micro Devices, Shoretel,
Integrated Silicon Solution, SoftBrands, Macusani Yellowcake, and
Paramount Gold and Silver; a repricing request went to a vote at Spark
Networks on Jan. 5.

The term “repricing” is often used broadly to refer to amending
outstanding stock options to lower the exercise price after the date of
grant, or to cancel out-of-the-money options and regrant the underlying
shares at then-current fair market value, or to replace them with
another type of award or exchange them for cash.

New York Stock Exchange-listed companies may not undertake option
repricings or exchanges without shareholder approval, unless
stockholders have approved an equity plan that explicitly permits such
action. The rules for NASDAQ companies are slightly different. The
NASDAQ states that if a company’s equity plan is silent on the
repricing of outstanding awards, then it is left to the company’s
discretion to interpret the plan with regard to this issue.

Of the nine technology companies that did not put their repricing
programs to a vote in 2008, five had omnibus stock plans that permit
repricing, while three were silent on the issue (two of these are
NASDAQ-listed, and one is traded over the counter). The remaining
company, Virage Logic, implemented a value-for-value exchange program,
although its omnibus plan expressly prohibited option repricing without
prior shareholder approval and implied that such approval would be
sought for any bailout of underwater options.

In voting on repricing or option-exchange proposals, shareholders typically consider key factors such as:

more...http://blog.riskmetrics.com/2009/01/many_companies_avoid_votes_on.html