Backdating Stock Options

Is Backdating Stock Options Legal?

Backdating stock options is the practice of issuing stock options at a later date than the one shown on the options themselves. The practice is highly controversial, although it is not illegal by itself. It is only when it is used in a deceptive way to cover up accounting irregularities that it becomes against the law. There are many cases where there is an inevitable degree of backdating, due to the fat that a large options issue may take some time to put into place.

Many corporations defend their right to issue backdated options, stating truthfully that there is nothing illegal or immoral about it as long as there is full disclosure. The right to issue options which are already what is known as “in the money”, that is the underlying stock could already be sold at a profit, is also firmly established in law. The difficulty again occurs when the system is abused and subjected to deception. As the tax implications are totally different with “in the money” options, there is a considerable incentive for companies to try to game the system.

Because of certain high profile cases in which stock backdating has occurred, there is a considerable public misconception that it is totally illegal. This is, as we have seen, not the case, as has been established by federal judge. This misconception has led to an unfortunate association in the minds of the public of legitimate stock backdating with executive corruption even when there is nothing underhand going on. It is usually accurate reporting which is the key issue. Providing this happens, there is not usually anything underhand occurring.

The issuing of stock options is usually designed as a means to attract workers whose services are in demand, by offering them a stable benefit which will increase over time. The expectation is that the stock will rise, allowing employees the possibility to purchase the share at a predetermined lower price. It is obviously hoped that the employee will continue to hold the stock as an affirmation of faith in the company policies and of the future. The employee, however, is never under any obligation to do this.

There will usually be some kind of restrictive clause which will determine when it is possible for the employee to take up the options. This is because the employer does not want workers to just take a quick windfall and then move to a competing organization. Often, you will need to serve for two years before you have the right to claim your options. Of course, the price may be fluctuating wildly at this time in the future. It is this exact timing difficulty that leads to the potential issue with backdating stock options.

 

 

 

 

 

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