June 21, 2007

Corp Fin No-Action Letter: A New 409A Option Repricing Twist

Last week, Corp Fin’s Office of Mergers & Acquisitions issued a new 409A stock option repricing exchange offer no-action responses, designed to increase the exercise price of the options to avoid the tax penalty and compensate option holders with cash for the resulting increase in the exercise price. The no-action letter is to HCC Insurance Holdings. Officer and directors are excluded from the offer – as the Staff prefers.

The novel or unique aspect that I can see is that the SEC Staff is permitting a longer than usual period for the payment of the cash consideration. This is the first time the Staff has allowed issuers to time payment of the cash offered in a 409A repricing offer to the vesting of the related options. Previously, the Staff required issuers in a 409A option repricing to make any cash payments shortly after January 1, 2008.

Under the terms of this letter, however, it appears that the Staff is allowing some additional time (i.e., until the end of the year or quarter) for the cash payment to be made. The key is that employees have a right to receive the cash once the option vests-although the cash will be paid quarterly. So in this situation, for all options vesting prior to January 1, 2008, the cash payment is earned at the date of exchange. So, if the exchange occurs in June, my options vest in October, I am fired in December of ’07, I still get the cash in January. After January, it becomes tied to vesting.

In doing so, the issuer is conditioning issuance of the cash payment on the option actually vesting and the employee still being employed with the company at the end of the period. So there is a retention element that – up to this point – for which relief had not been granted by the Staff.

Remember that the Chordiant Software letter was global exemptive relief granted by the Staff; this new HCC Insurance Holdings letter is not – and it should not relied upon by anyone else. If someone wants the HCC -type of relief, they need to approach the Staff first. My guess is that if a couple of letters do come in, the Staff may turn one of them into a global relief letter. Thanks to Jim Moloney for his help on this one!