Legal issues with backdating stock options norton 360 v5 not updating

August 1, 2006 One of the dominant stories of late in the equity compensation area is the revelation by numerous companies that they are being investigated, by the government or in internal investigations, in the fast-spreading controversy generally referred to as "stock option backdating." Every day, it seems, additional companies announce the receipt of subpoenas or the commencement of internal investigations regarding their stock option grant practices.

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The Internal Revenue Service has also indicated that, due to the significant tax effects that option backdating can have, it likely will also investigate these situations.

The investigations, and companies' disclosures that their practices were being scrutinized, were initially fueled by numerous stories in the press exposing unusual correlations between option grant dates at certain companies and the date on which the companies' stock reached relatively low trading prices.

The question to be answered by these investigations is whether corporations used stock option grants to improperly enrich their senior executives.

These investigations focus on two main issues: (1) whether options were "backdated," or granted retroactively as of a date when the stock price was low, creating a built-in profit, and (2) whether options were granted immediately before corporate announcements that were likely to increase the price of the shares.

The issues raised by these numerous investigations include tax, accounting, securities law disclosure, corporate governance and insurance issues.

Key implications include: Accounting Issues: Prior to certain recently adopted rules, if an option was granted with an exercise price at or above the market price at the date of grant, the company was not required to recognize that grant as an expense.

Thus, by backdating an option, a company could preserve this ability to avoid a compensation expense.

Even under the new rules, backdating an option could substantially lower the expense the company must recognize.

The failure to have properly accounted for this expense could require a company to restate its financial statements.

Securities Law Disclosure Issues: Failure to have disclosed backdating conduct in a company's SEC filings could mean that the company's disclosures concerning its executive compensation were inadequate or contained misstatements, potentially leading to liability for securities violations.

Corporate Governance: Backdating conduct may raise a question as to the authority to grant the options, particularly if the plan under which the options were granted does not permit the grant of "discounted options." This question becomes more pertinent if shareholder approval for the issuance of such stock options is required by the company's state of incorporation.

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