Define: Notice of Disposition

What Notice of Disposition Means in a Contract

A Notice of Disposition is a defined mechanism within an equity compensation or stock option agreement that allows an optionee to communicate, in writing, an intention to exercise vested options without incurring an immediate monetary outlay. Rather than paying the strike price in cash, the optionee arranges for the disposition, typically a same-day sale or transfer, of a sufficient number of underlying shares to cover the exercise cost and any applicable withholding. The notice formalizes that arrangement and puts the company or plan administrator on record as to the optionee's chosen method.

This concept sits at the intersection of employee benefits law, securities compliance, and corporate governance. It is not a generic notice provision like a change-of-address clause; it is a specific instrument tied to the exercise mechanics of options granted under a stock plan. Because it triggers a taxable event and a transfer of ownership, the notice must be precise about the number of options being exercised, the disposition method, and the effective date.

How Notice of Disposition Is Defined or Measured

The definition of a Notice of Disposition is almost always anchored to a specific clause within the underlying option or stock plan agreement. That clause will typically specify the required form of the notice, whether it must be delivered electronically or in hard copy, and the deadline relative to the intended exercise date. Some plans measure compliance strictly by receipt date, while others measure it by the date of dispatch, so the operative timing mechanism is a critical detail.

Measurement also extends to the financial mechanics triggered by the notice. Once delivered, the notice typically authorizes the company or a designated broker to sell or withhold shares equal in value to the exercise price plus tax withholding obligations, then deliver the remaining net shares to the optionee. The precision of this calculation, and the clause governing it, determines whether the disposition is treated as cashless exercise, cashless sell-to-cover, or another permitted variant under the plan.

• Number of vested options being exercised.
• The disposition method selected, such as sell-to-cover or full cashless sale.
• The effective date and any notice period required before execution.
• Any conditions precedent, such as blackout periods or insider trading restrictions.

Where Notice of Disposition Appears in Agreements

This term most commonly appears in stock option agreements, equity incentive plan documents, and related exercise notice forms used by companies granting share-based compensation. It may also surface in shareholder agreements or cost sharing arrangements where equity transfers between parties require formal documentation, similar in spirit to the structured notice provisions found in a