The NASPP Blog

February 10, 2009

Repricing RSUs?

Ok, it isn’t really a repricing, but I was surprised to see a tender offer filing last week for restricted stock units.  Option exchange programs are happening quite frequently these days, but an exchange program for restricted stock units is unusual enough to be worthy of a blog entry.

RSU Tender Offer

Diamond Management & Technology Consultants is offering to allow employees to exchange unvested restricted stock units for fully vested shares of stock (see their Form SC TO-I filing on February 5). This sounds like a pretty good deal, so why is tender offer compliance even required? Because employees have to agree to forfeit 20% of their RSUs in exchange for the stock. In addition, although the stock they receive will be fully vested (i.e., not subject to forfeiture), employees will be required to hold it for at least six months and up to four years, depending the employee’s position with Diamond.

Why Bother?

I tossed the idea around with a few folks and we came up with the following potential reasons to offer an exchange like this:

  1. To add shares back into the plan.
  2. To get voting shares into the hands of employees (e.g., if there was some sort of proxy challenge anticipated).
  3. To recognize the remaining expense on awards that are now worth significantly less and move forward with a clean slate (a “rip the band-aid off” approach).
  4. Because the company is considering a change in compensation strategies (e.g., moving to a more cash-based compensation approach).

According to Diamond’s earnings release, reason #4 was their primary motivation for the program.

No Accounting Benefits

From an accounting standpoint, a company doesn’t do itself any favors by offering an exchange like this.  When vesting is accelerated at a time when the award recipient’s termination isn’t expected or imminent, there is no incremental cost for the modification but the company will have to immediately recognize all remaining unamortized expense for the awards (see the discussion of non-price related modifications in chapter 8 of my book “Accounting for Equity Compensation Under FAS 123(R)“. The expense recognized is the remaining unamortized expense on the full amount of the original awards, not just 80% of that amount.  The company doesn’t get any credit or reduction in expense for the 20% of the awards that employees agree to forfeit (see my January 20 blog on “Options for Nothing“–the same concept applies here). 

If, however, vesting weren’t accelerated and employees inevitably terminated before the original vest dates, the company would not recognize expense for the forfeited RSUs. Thus, by accelerating vesting, Diamond could end up recognizing more expense, even though employees forfeit 20% of their awards to participate in the program. 

Reason #12 to Renew Your NASPP Membership:  Sample Communications for Option Exchange Programs

While I’m on the topic of option exchange programs, if your company is in the process of implementing one, the sample employee communications in our Underwater Options Portal could be a real time saver.

Early-Bird Rate Extended for NASPP Online Course on M&A

Due to overwhelming demand, the early-bird rate for the NASPP’s newest online educational program, Tackling Equity Compensation Issues Related to Mergers & Acquisitions, has been extended to Friday, February 20. At only $495, this course is a true bargain–and members that register by February 20 qualify for yet another $100 off this price. Stock plan professionals involved in any aspect of the M&A process won’t want to miss this valuable program.  

NASPP “To Do” List

We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blogs. 

– Barbara