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U.S. Securities and Exchange Commission

Excerpt from Current Issues and Rulemaking Projects Outline Quarterly Update (March 31, 2001)

Option Exchange Offers


On March 21, 2001, the Division of Corporation Finance, pursuant to delegated authority from the Commission, issued an exemptive order under the Securities Exchange Act of 1934 (Exchange Act) for issuer exchange offers that are conducted for compensatory purposes. The order exempts these exchange offers from Rules 13e-4(f)(8)(i) and (ii), the all holders and best price rules, so long as the following conditions are met:

  • the issuer is eligible to use Form S-8, the options subject to the exchange offer were issued under an employee benefit plan as defined in Rule 405 under the Securities Act, and the securities offered in the exchange offer will be issued under such an employee benefit plan;
  • the exchange offer is conducted for compensatory purposes;
  • the issuer discloses in the offer to purchase the essential features and significance of the exchange offer, including risks that option holders should consider in deciding whether to accept the offer; and
  • except as exempted in this order, the issuer complies with Rule13e-4.


The Division of Corporation Finance has become aware of issuers conducting exchange offers to reprice their employees' stock options. The structure of these exchange offers varies from issuer to issuer and is based upon their compensation policies and practices. Frequently these exchange offers will require option holders to agree to revised vesting or exercisability terms or to accept a reduced number of securities in exchange for receiving a lower exercise price. The new options or other securities offered in exchange for existing options may be registered under the Securities Act of 1933 (Securities Act), but generally are offered in reliance on an exemption from registration, typically Section 3(a)(9) of the Securities Act.

These offers commonly involve securities issued through broad-based plans, are open to a large number of employees, are not limited to executive or senior officers of the issuers, are not privately negotiated compensation arrangements, have fixed terms, and are open for a limited period of time. Unlike the situation where an issuer unilaterally reprices its options, the option holders have individual decisions to make. Further, the decision whether to accept the offer is an investment decision and not merely a compensation decision. These exchange offers are subject to the issuer tender offer rule, Rule 13e-4 under the Exchange Act, if the issuer has a class of equity securities registered under Section 12 or is required to file reports under Section 15(d) of the Exchange Act.

The exemptive order eliminates the limitations that the all holders and best price rules place on issuers' ability to structure exchange offers consistent with their compensation policies and practices. This will reduce the burdens and costs to issuers that otherwise must seek individual exemptions from the Division. We believe that these exchange offers do not present the same concerns caused by discriminatory treatment among security holders that these rules were intended to address.

Disclosure and Processing

Issuers that are subject to Rule13e-4 are reminded that the remaining provisions of Rule 13e-4, as well as Regulation14E, apply to these exchange offers. A Schedule TO-I must be filed at the time the exchange offer commences, and the disclosure required by the schedule must be disseminated to option holders in accordance with Rule 13e-4. The disclosure items of the Schedule TO-I must be complied with in the offer to purchase only to the extent applicable. The items do not require a response in the offer to purchase if they are not applicable to the offer. The disclosure should set forth clearly the essential features and significance of the exchange offer, including risks that option holders should consider in deciding whether to accept the offer. The disclosure also should include financial information about the issuer, which generally is material to the option holders' investment decisions. See Item 10 of Schedule TO. The financial information in the disclosure may be in summary form if the issuer incorporates its financial statements by reference into the schedule and offer to purchase. See Instruction 6 to Item10 of Schedule TO.

We understand that issuers contemplating option exchange offers are concerned that staff review may cause issuers to incur additional costs to disseminate revised materials in response to staff comments and also may cause offers to be extended. The Division always balances the necessity of staff review with the best use of staff resources. These types of exchange offers are conducted for compensatory purposes and are less likely to raise the concerns that often are present in non-compensatory tender offers. In this regard, the Division staff's decision to review these exchange offers will take into account the presence of the disclosure discussed above. Issuers should note that they are responsible for full compliance with Rule 13e-4 whether or not the staff reviews the filings. Issuers also are reminded of their disclosure obligations under Item 402 of Regulations S-K and S-B and under generally accepted accounting principles.

Issuers or their counsel should contact the Office of Mergers & Acquisitions at (202) 942-2920 if they have questions about the exemptive order or compensatory option exchange offers generally.



Modified: 02/09/2007