ETASSUM44250 - Schedule 4 Company Share Option Plan (CSOP): Requirements relating to options: Rights issues

Adjustments to reflect rights issues are more difficult and a company or their scheme organiser should normally refer the company's proposals to SAV for advice on whether the adjustments are acceptable.

The basic principle is that the 'necessary' adjustment is one which would adjust the acquisition price per share (which is based on the market value of the shares at the date of grant) and the number of shares, to what it would have been had the new share structure been in place when the options were first granted.

SAV accept that the following formula is acceptable for computing the adjustment to be applied to the original option acquisition price to take account of a rights issue, which if used, will not require SAV approval of the adjustment. This however is not necessarily the only method of adjustment acceptable to SAV.

Rights issue formula

Adjust by: A divided by M

Where:

  • A is the average value of a share following the rights issue (the theoretical ex-rights price)
  • M is the mid-market value of a share on the last day the shares were listed cumulative rights

The average value of a share following the rights issue (A) is computed by:

N multiplied by M

Plus

R multiplied by P

Divided by

R plus N

Where:

  • N is the number of shares required to entitle the holder to ‘rights’ shares
  • M is the mid-market price of each of those shares on the last dealing day cumulative rights
  • R is the number of ‘rights’ shares offered per N
  • P is the price at which each 'rights' share is offered

The number of shares in the option is then adjusted by the reciprocal of the above.

An example:

  • Existing option over 1000 shares at 40 pence per share
  • Company makes 1 for 4 rights issue at 50 pence per share (N=4; R=1; P=50 pence)
  • Mid-market price of a share on last day listed cumulative rights (M) = 65 pence

The calculation is as follows:

4 multiplied by 65 pence

Plus

1 multiplied by 50 pence

Average Price (A) 1 plus 4 equals 62 pence per share

Adjusted option exercise price is 40 multiplied by 62 divided by 65 equals 38.153 pence

Adjusted number of shares is 1000 multiplied by 65 divided by 62 equals 1048.4 shares

Aggregate option exercise price remains as £400 (now 1048.4 shares multiplied by 38.153p each)