Many issuers are contemplating changes to their option plans to address issues with respect to underwater options. One of the many issues to be considered is what amendments require shareholder approval for NASDAQ listed issuers. New York Stock Exchange listed issuers are subject to similar rules.

NASDAQ listed companies must seek shareholder approval when they establish or materially amend a stock option or purchase plan or other arrangement pursuant to which stock may be acquired by officers, directors, employees or consultants. This includes any sale of securities at a discount to the market value to an officer, director, employee or consultant, even if part of a larger financing transaction.

NASDAQ guidance states a “material” amendment includes, but is not limited to, the following:

  • Any material increase in the number of shares to be issued under the plan (other than to reflect a reorganization, stock split, merger, spinoff or similar transaction);
  • Any material increase in benefits to partici¬pants, including any material change to: (i) permit a repricing (or decrease in exercise price) of outstanding options, (ii) reduce the price at which shares or options to purchase shares may be offered, or (iii) extend the duration of a plan;
  • Any material expansion of the class of partici¬pants eligible to participate in the plan; and
  • Any expansion in the types of options or awards provided under the plan.

The general authority to amend a plan does not obviate the need for shareholder approval if the amendment is material. However, if a plan permits a specific action without further shareholder approval, then shareholder approval would generally not be required. Nevertheless, NASDAQ takes the position that unless there is specific authorization in a plan, a repricing, or a similar action, would not be permitted without shareholder approval.

NASDAQ considers a “repricing” to mean any of the following, or any other action that has the same effect:

  • Lowering the strike price of an option after it is granted;
  • Any other action that is treated as a repricing under generally accepted accounting principles; or
  • Canceling an option at a time when its strike price exceeds the fair market value of the underlying stock, in exchange for another op¬tion, restricted stock or other equity, unless the cancellation and exchange occurs in connec¬tion with a merger, acquisition, spinoff or other similar corporate transaction.

Cash buybacks of outstanding options are permitted without shareholder approval, unless the action is treated as a repricing under generally accepted accounting principles. The reason is the NASDAQ rules apply to equity awards and not to a payment of cash.

Neither a change in the vesting terms for an award nor the extension of the term of an option is generally considered a material amendment that requires shareholder approval. However, such changes cannot result in an extension in the term of the award beyond the maximum allowable term under the plan or be in addition to the aggregate shares available under the plan.