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Ability to Use "Change in Control Price" for SARs under 409A


Guest DKG

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I've noticed a large number of public company incentive plans contain the concept of a "Change in Control Price". Typically, if there is a change in control, all options and SARs vest, and holders receive a payment equal to the "Change in Control Price" less the exercise price. “Change in Control Price” is usually defined as the highest price per share during the 30 or 60-day period immediately preceding the occurrence of the Change in Control...

My concern is that this would cause otherwise exempt SARs to fall within 409A, because 1.409A-1(b)(5)(i)(B) provides that compensation payable under the SAR cannot be greater than the excess of the FMV of the stock on the date the SAR is exercised over the FMV on the date of grant, and if it is, 1.409A-1(b)(5)(i)© provides that the grant will generally be a deferral of compensation subject to 409A.

I don't see that the definition of FMV for public companies under 1.409A-1(b)(5)(iv)(A) is broad enough to permit using the highest price during the previous 30 (or 60) days. For instance, suppose an SAR had a grant price of $1/share (its FMV), and the FMV as of the change in control is $5, but sometime during the 60 day period preceeding the change in control the stock price hit $10/share before dropping back down. If the "Change in Control Price" is $10 when the current FMV is only $5, it seems like the recipient is receiving more than the excess of the FMV of the stock on the date the SAR is exercised over the FMV on the date of grant, and thus would not fit within the SAR exemption.

Any thoughts on this? A number of recently drafted plans by reputable firms contain this type of provision, but I just can't seem to get comfortable that it works with respect to SARs.

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