{"id":31677,"date":"2016-03-31T19:21:46","date_gmt":"2016-04-01T00:21:46","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/using-stock-to-exercise-options.html"},"modified":"2018-01-18T14:15:32","modified_gmt":"2018-01-18T19:15:32","slug":"using-stock-to-exercise-options","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/business-operations\/using-stock-to-exercise-options.html","title":{"rendered":"Using Stock To Exercise Options"},"content":{"rendered":"
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A stock-for-stock option allows holders of an option to use shares of stock they already own to pay for new shares. With a stock-for-stock option exercise, the option holder pays the option exercise price by delivering (either by physical delivery or by attestation) previously-owned shares of Company stock with a value equal to the option exercise price. This is a expeditious method of exercising a stock option<\/a>, because there is no need to obtain cash to exercise the option. Further, by exercising an option in this manner, the option holder is able to avoid taxable gain from the sale of stock to obtain cash for the purchase of new shares.<\/p>\n

Plan Provisions<\/b><\/p>\n

Most stock option plans<\/a> permit stock-for-stock option exercises. If not, the plan must be amended in order for this type of transaction to take place. In most cases, a plan amendment to add a stock-for-stock option exercise provision will not require shareholder approval, although the specific terms of each plan must be reviewed.<\/p>\n

Amending an option plan or an individual option agreement to permit stock-for-stock option exercises<\/a> should not be considered a "modification" for purposes of Section 162<\/a>(m) of the Internal Revenue Code (the $1,000,000 deduction limitation). However, such an amendment would be considered a "modification" for "incentive stock option" (ISO) purposes. As a result, amending an option plan or agreement to add a stock-for-stock exercise feature to an ISO will ordinarily disqualify the ISO and convert the ISO into a "nonstatutory stock option<\/a>" (NSO) for tax purposes. Companies should also consult with their accountants to determine whether any such amendment triggers a compensation expense for financial accounting purposes.<\/p>\n

Mechanics<\/b><\/p>\n

The shares that are used to pay the option exercise price can be delivered either by actual physical delivery of a stock certificate<\/a> to the company or through attestation. With attestation, the option holder<\/a> represents to the company, by executing an affidavit, that he or she owns other shares of company stock in a quantity sufficient to exercise the option. Attached is a sample form of attestation affidavit. Unlike stock certificates, an attestation form can be delivered by fax or e-mail. Upon receipt of the attestation form together with the company’s option exercise form, the company simply issues the net shares representing the spread at exercise.<\/p>\n

An example of a stock-for-stock option exercise follows:<\/p>\n