Backdating options legal
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.
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.
The practice of “backdating” stock option grants has recently captured the attention of regulators, prosecutors, the plaintiffs’ bar, shareholders and the media.
The SEC’s Enforcement Division and the offices of the United States Attorney are investigating the option granting practices of dozens of companies and actions taken by their executives.
Finally, an option granted at less than fair market value that either vests in whole or in part after December 31, 2004 or granted or modified after October 3, 2004 raises issues under the new deferred compensation rules set forth in Section 409A of the Code.
Under Section 409A, the recipient could be subject to acceleration of taxable income and additional taxes and penalties, and the company could be subject to special tax withholding and reporting requirements.
There was a spate of backdating stock options in the 2000s, mostly at technology firms that rely heavily on stock options for executive compensation, but also at some companies not in the tech sector.
But if these conditions are not met, a number of negative consequences can result, depending on the individual circumstances of the practice at issue.
Options that are granted at less than fair market value result in higher levels of compensation expense.
The backdating scheme involved moving an effective date for the exercise of stock options from when the options were 'out of the money' to a date that made the options 'in the money' in order to allow certain executives to exercise their options profitably.
Companies such as Comverse, Verisign, F5 Networks, Intuit and Mc Afee - as well as Home Depot, Michael's Stores and United Health Group, to name a few - all engaged in this fraudulent activity to varying degrees and were forced to pay fines and penalties and conduct time-consuming and expensive restatements of their books.
Grants to new employees based on inaccurate employment commencement dates are troublesome.