Is backdating stock options illegal
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.Options granted as of the date of employment acceptance are also troublesome if the plan does not permit grants to non-employees or if the additional tax and accounting issues relating to grants to non-employees are not adequately addressed.A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.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.Exceeding the authority set forth in a shareholder-approved plan may also run afoul of stock exchange rules requiring shareholder approval of equity-based compensation.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.
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.
Several companies have expressed their intent to restate financial statements due to option timing issues, and opportunistic attorneys have already filed derivative and class action lawsuits.
The author of the academic study who is credited with focusing regulators on this issue estimates that at least 10% of “at-the-money” grants of options to CEOs between 19—before Sarbanes-Oxley shortened the reporting period for option grants—were backdated.
Grants to new employees based on inaccurate employment commencement dates are troublesome.
Options granted as of the commencement of employment based on the market price as of the date of acceptance may be problematic if the plan does not permit below-market grants or the grant is not treated as a discounted option for accounting and tax purposes.