On September 7, 2007, the litigation committee of the Association of Corporate Counsel hosted a web cast on stock options backdating. The presentation featured attorneys from O’Melveny & Myers, LLP and Winston & Strawn, LLP.
Backdating means going back in time to create a grant date where the stock is trading below its actual grant date. The controversy relating to backdating stock options began with publications by Professor Erik Lie of the University of Iowa. He studied stock option grants awarded to chief executive officers from 1992 – 2002, and later from 1996 – 2005, and found abnormal returns before and after grant dates. The advantage of backdating is the additional compensation provided to management through lower exercise prices.
Since the published findings, there have been numerous companies under scrutiny including: Jabil, Altera, Juniper Networks, Rambus, Converse Technology, McAfee. Investigations may lead to securities fraud litigation, tax consequences, earnings restatements.
Following August 2002, the Sarbanes-Oxley Act of 2002 required the reporting of stock option grants to Section 16 officers and directors to the Securities Exchange Commission (SEC) on Form 4 filings within two business days of the option grant date.
Companies should review their exposure on stock option grant issues by reviewing company bylaws and equity award plans to determine the procedures on awarding stock options. Procedures include (1) who has authority to grant options, such as whether it is the board of directors, compensation committee, or an executive officer, and (2) when options may be granted.
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