Intentional stock backdating
The Santa Monica, Calif., videogame company said on July 28 that the SEC has asked the company for documents related to its stock-option grants as part of an informal inquiry.The company also said its board has appointed a special subcommittee of independent directors to conduct an internal review of the companys historical stock-option grant practices. 25 the company said it appears likely that actual measurement dates for certain historical stock-option grants will be found to differ from the recorded grant dates for such awards.Additionally, companies can use backdating to produce greater executive incomes without having to report higher expenses to their shareholders, which can lower company earnings and/or cause the company to fall short of earnings predictions and public expectations.Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.Law360, New York (February 15, 2007, AM EST) -- On Feb.
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.
SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.
Most employee stock options are, or purport to be, granted “at-the-money,” meaning that the exercise price of the option equals the market price of the underlying stock on the date of the grant.
In the first decision, involving allegations of backdating at Maxim Integrated Products Inc., the Chancellor recognized that stock option backdating is inherently deceptive and that “[a] director who approves the backdating of options faces at the very least a substantial likelihood of liability” for breaching the fiduciary duty of loyalty.
In the second case, involving allegations of stock option spring-loading at Tyson...In its most basic form, backdating can range from the blatant falsification of a document to take advantage of a lower stock price to allowing executives to select a grant date during a specified period, for example during the 30 days after the grant is approved by the board or committee.