We have learned that some major accounting firms are advising clients that the typical anti-dilution provisions of existing equity compensation plans may need to be amended in order to avoid potentially significant increases in compensation expense associated with adjustments to equity awards in connection with stock splits, stock dividends or other changes in the issuer's capitalization. For example, PriceWaterhouse Coopers has published a memorandum (publicly available here) with their analysis of the issue.

The issue turns on whether the anti-dilution adjustment applied to awards under equity plans is determined to be mandatory or permissive. If the adjustment is determined to be permissive, then the award is deemed to be modified upon adjustment under FAS 123R, resulting in a re-calculation of the fair value of the award and a possible increase in the compensation expense for the company.

Many plans are written flexibly, allowing compensation committees to determine whether the corporate event is one triggering an appropriate anti-dilution adjustment. Companies should review the terms of their equity compensation plans and arrangements and consult with their external auditors concerning this issue well in advance of any change in capitalization requiring an adjustment of awards under their equity plans.