The consequences of backdating executive stock options

But if these conditions are not met, a number of negative consequences can result, depending on the individual circumstances of the practice at issue.

the consequences of backdating executive stock options-6

Civil and criminal authorities are investigating the option granting practices of many companies.

Companies and individuals could face monetary penalties, restitution and disgorgement under the securities laws and the Internal Revenue Code.

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 stock plans of many public companies prohibit the granting of below-market options; other companies disclose in their SEC reports that stock options are granted at market and prepare their financial statements on that basis.

The term “backdating” refers to a number of option granting practices in which the reported grant date is different from the date on which the option is actually awarded, resulting in an option that is already “in-the-money” at the time of the grant.

If the compensation expense is not properly reflected in earnings, the company’s financial statements will be inaccurate and restatement of the financials may be required.

The discovery of past backdating practices may raise issues as to the adequacy of the company’s internal controls and disclosure controls and procedures.

Before FAS 123R, generally only options granted below fair market value resulted in any compensation expense.

After 123R, the “fair value” of discounted options will be greater than the “fair value” of comparable undiscounted options, resulting in higher compensation expenses.

Options granted at less than fair market value or without proper board or committee approvals may violate the terms of the applicable option plan, with the result that options could be invalid.

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