dating permission slip - Preventing backdating of
Another scenario involves the allocation of grants to employees from an authorized pool.
If the exercise price is set when the pool is authorized by the board or committee but the allocation and actual grants occur later (when the stock price has increased), backdating issues may arise.
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.
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.
State law and bylaw provisions as to the time of effectiveness of unanimous consents may be helpful in evaluating these issues. It is important to note that most of these practices are not inherently illegal.