The rain pounding on your office window dances in the flickering glow of your fluorescent lights. As you wonder if anything could make the day gloomier, the Director of HR arrives with a spreadsheet showing last quarter’s cashless option exercises and shares withheld for taxes. Her footsteps fade, and your mind jumps to the repurchase table in Forms 10-Q and 10-K. You pull out Item 703 of Regulation S-K, skim it quickly and freeze.
Q: Do “net” option exercises require disclosure under Item 703? How about withholding vested shares to pay withholding tax?
A: No and Yes.
Item 703 does not provide a clear answer. However, the SEC staff has stated that the answer to these two inquiries (and similar questions under Item 703) depends on whether or not the shares used to satisfy the exercise price, tax withholding or other transaction are deemed to be already outstanding at the time of the transaction. If they are, then a repurchase occurs and must be reported. If they are not, then there is no repurchase to trigger the disclosure.
Specifically, “net” option exercises involve shares that are never issued to the option recipient, but instead are retained by the company to pay the exercise price or tax at the time of exercise. Those retained shares do not appear in the Item 703 table.
On the other hand, restricted shares are typically deemed to be issued on the date of grant. The subsequent vesting of those shares can trigger a tax event. The withholding by the company of subsequently vested restricted shares to cover the withholding tax is in effect a repurchase of those shares. They go in the Item 703 table.