Executive stock option plans backdating motivation
A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.
This problem occurs most often when boards or committees act by unanimous written consent but there is a delay in the receipt of all of the signed consents.
In 2005, I posted on the major scandal involving companies’ backdating stock option awards.
The first hint that a problem existed in this area was an academic study finding that many public companies seemed to be prescient enough to award stock options on the day the company’s stock price hit its low for the year, and strongly suggesting that this was much more than mere coincidence.
Companies might also need to consider disclosure about how the board or compensation committee considers such information when determining whether and in what amount to make those grants.
The practice of “backdating” stock option grants has recently captured the attention of regulators, prosecutors, the plaintiffs’ bar, shareholders and the media.
A company may want to give a new employee the benefit of any increase in the stock price from the date of acceptance of the employment offer.
Grants to new employees based on inaccurate employment commencement dates are troublesome.
Before FAS 123R, generally only options granted below fair market value resulted in any compensation expense.The SEC does The rules indicate that a company should disclose in the CD&A whether it had (or has in the current fiscal year) a practice of selecting option grant dates for executive officers in coordination with the release of material non-public information.If the Company has such a program, plan or practice, the company should disclose that the board of directors or compensation committee may grant options at times when the board or committee is in possession of material non-public information.Even though no documents are backdated and there may be no intent to select a lower exercise price, backdating issues may arise if the stock price increases before the corporate formalities have been completed.State law and bylaw provisions as to the time of effectiveness of unanimous consents may be helpful in evaluating these issues. It is important to note that most of these practices are not inherently illegal.