dre2xl
December 27, 2006, 3:38pm
1
I did a search on Apple and not much turned up–sorry if this was posted. But what’s illegal about options backdating? I’ve heard of some companies that have since readjusted their stock benefits (though I can’t say I specifically heard of backdating, though that is what I assumed at the time) as to not to screw employees that got hired during the dotcom boom.
Backdating
As the term suggests, backdating is nothing but the practice of marking a document with a date that precedes the actual date. In the stock-option grant context, backdating allows employees to choose a past date as their stock-option grant date when the share price was particularly low, and thereby blow up the value of the options.
Is backdating illegal? Necessarily not, according to experts. However, the companies need to comply with a few conditions to make the option backdating legal. First of all, shareholders should be clearly aware of the backdating, as they are the ultimate bearers of the inflated compensation impact. Also, there should not be any forged documents and the backdating should be reflected in earnings appropriately. As backdating chooses a grant date with a lower price than the actual decision date, the options are effectively in-the-money on the decision date, and thereby, reported earnings should be reduced for the fiscal year of the option grant.
In addition, the backdating should be reflected in taxes. This is because the purchase price affects the basis that is used for estimating the company’s compensation expense for tax purposes and any capital gain for the option recipient. Thus, an artificially low exercise price might alter tax payments for both the company and the option recipient.
Failure in fulfilling these conditions can invite allegations that the company acted fraudulently and it may have to restate its financial statements to rectify the errors. In addition, backdating raises issues related to sensible governance, alignment of shareholder interests and adequacy of internal controls as it is viewed as means to steal money from shareholders.
Spring-loading, Bullet-dodging
These are two tactics related to the options backdating game. Spring-loading refers to the granting of options just before the release of positive news that is likely to drive up the company’s stock. Bullet-dodging is another ploy in which stock options are granted after negative news that has already driven down the stock price.
http://www.tradingmarkets.com/.site/news/TOP%20STORY/493402/
But is backdating illegal? Not necessarily, if it is:
* Clearly communicated to the company shareholders.
* Properly reflected in earnings. For example, because backdating is used to choose a grant date with a lower price than the price on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant. Because backdating is typically not reflected properly in earnings, some companies may have to restate earnings for past years.
* Properly reflected in tax calculations. For tax reasons that are beyond the scope of this article, an artificially low exercise price might alter tax payments for the company and the option recipient.
Unfortunately, these conditions are not always met, making backdating illegal in many cases.
http://www.fredlaw.com/articles/whitecollar/whit_0607_mtb.html
dre2xl
December 27, 2006, 4:16pm
3
Well, teaches me to use Google. Thanks.
Nicely done, x-ray vision ! I was about to post a much less informative, and less clear explanation. No point now.
Tris
