Notice of change in exercise price: Overview, definition, and example
What is a notice of change in exercise price?
A notice of change in exercise price is an official communication from the issuer of a stock option, convertible security, or other equity-related instrument, informing the holder(s) of any changes to the price at which they can exercise their rights to purchase or convert securities. The exercise price (also known as the strike price) is the price at which the holder of a stock option or warrant can buy the underlying stock.
The notice typically provides details on how and why the exercise price has been adjusted, which could be due to actions such as stock splits, dividends, mergers, or other corporate actions that impact the price of the stock.
Why is a notice of change in exercise price important?
A notice of change in exercise price is important because it ensures that the option holders or warrant holders are aware of any adjustments that may affect the value of their options or warrants. Such changes can have a significant impact on the cost-effectiveness of exercising the option, as it directly affects the price at which the holder can acquire shares.
For businesses, providing a clear notice of change helps ensure compliance with securities laws, enhances transparency, and maintains good relations with investors. For option holders, receiving this notice ensures they can make informed decisions regarding the exercise of their options.
Understanding notice of change in exercise price through an example
Suppose a company issues stock options to its employees with an exercise price of $20 per share. After a 2-for-1 stock split, the company adjusts the exercise price to $10 per share, as the number of shares each employee can purchase doubles. The company sends out a notice of change in exercise price to the employees, informing them that their new exercise price is now $10 per share, reflecting the impact of the stock split.
In another case, a company may declare a dividend and adjust the exercise price of stock options to account for the dividend payout. If a stockholder’s options were originally priced at $50 per share and the company announces a dividend payout, the exercise price might be lowered to reflect the value of the dividend. A notice of change in exercise price would be sent to inform the option holder of the new terms.
An example of a notice of change in exercise price clause
Here’s how this type of clause might appear in an option agreement:
“The Company hereby notifies the Optionholder of a change in the exercise price of the options granted under the [Option Plan] as a result of a [corporate action, e.g., stock split, dividend issuance]. The exercise price of each option is hereby adjusted from [$X] to [$Y], effective as of [date]. The Optionholder may exercise their options at the new adjusted price, and all other terms and conditions of the option agreement remain unchanged.”
Conclusion
A notice of change in exercise price serves as an essential communication tool to inform holders of stock options, warrants, or convertible securities of any adjustments to the exercise price. These changes may occur due to corporate actions such as stock splits, dividends, or mergers, and it is critical for holders to be made aware of them to make informed decisions regarding the exercise of their rights. For businesses, providing a timely and clear notice ensures compliance with regulations and supports transparency.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.