Antidilution Issues

A stock purchase can potentially flood the market with newly issued shares if the purchase fair market value (FMV) is much lower than the grant FMV. To protect shareholders, the IRS limits the number of shares that an individual participant can purchase. In addition to the IRS limit, corporations can implement additional rules to further limit the number of shares that participants can purchase. One of the ways that a corporation can limit the potential diluting effect of its stock purchase plan is to implement an antidilution rule, which is used when the purchase FMV is much lower than the grant FMV. There are many ways to define an antidilution rule, but all are designed to determine a price to use in calculating the maximum number of shares to purchase.