In the context of stock compensation, rescission is a rarely permitted and controversial practice allowing employees to rescind stock option exercises (or Section 83(b) elections
with restricted stock grants) if the stock price drops substantially from the price at exercise (price at vesting for restricted stock). Essentially, the company cancels the grant, and the employee who chooses to rescind receives the money paid at exercise in exchange for the stock. For incentive stock options
, this wipes out the tax treatment (e.g., an AMT calculation
) that would have been based on the spread at exercise, when the market price was much higher.
This questionable practice triggers variable accounting. Both the SEC and the FASB continue to examine it. Shareholders strongly dislike it. See a related FAQ on revoking or rescinding exercises and grants.