Jurisdiction(s):
United Kingdom

Key definition

Underwater definition

What does Underwater mean? Underwater describes, in restructuring and insolvency practice, a creditor, secured position or tranche whose recoveries sit below the value-break in the capital structure. In practical terms it is out of the money: based on valuations, it is unlikely to receive a full return (and may receive no dividend) under the distribution waterfall or a restructuring outcome. The term is market shorthand, not a defined term in UK or Irish insolvency legislation or case law, though the concept aligns with tests for economic interest used by the courts. In England and Wales, Scotland and Northern Ireland, it informs class formation...

Underwater Share Options in UK Companies: Legal, Governance and Tax Considerations, with Strategies Including Cancellation and Re-grant, Cash Cancellations, Parallel Awards, and Constraints on Re-pricing

Published by a LexisNexis Share Incentives expert

Practice notes

What is an Underwater share option?

An ‘underwater option’ refers to a share option (issued under any share option scheme) where the Exercise price per share exceeds the prevailing actual market value of the share. Consequently, if such an underwater option were exercised and the Shares sold at once, the option holder would incur a loss. Unsurprisingly, holders are disinclined to exercise underwater options, so in many situations alternative approaches to reward and incentivise those holders must be considered. Note that underwater options outside exit or leaver circumstances (ie where they do not lapse on an imminent exit or the imminent cessation of the option holder’s employment) may still carry a degree of ‘Hope value’, reflecting the prospect of an improvement in the company’s position and a rise in the share price, which could lift the market value of a share above the option’s exercise price. Underwater options are most prevalent in economic downturns and, as a result, they tend to be a cyclical issue for companies. A share option most commonly becomes underwater. Nonetheless, outside exit or leaver scenarios, they may retain hope value, based on potential improvement in the company’s position and share price exceeding the exercise price...

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Web page updated on 22/05/2026

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