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Options granted at less than fair market value or without proper board or committee approvals may violate the terms of the applicable option plan, with the result that options could be invalid.Exceeding the authority set forth in a shareholder-approved plan may also run afoul of stock exchange rules requiring shareholder approval of equity-based compensation.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.Options granted as of the date of employment acceptance are also troublesome if the plan does not permit grants to non-employees or if the additional tax and accounting issues relating to grants to non-employees are not adequately addressed.A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.Option grants to new employees have their own set of backdating issues.A company may want to give a new employee the benefit of any increase in the stock price from the date of acceptance of the employment offer.
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.Officers and directors could face criminal liability if they have intentionally falsified documents. Companies need to understand their historical option granting practices, address any potential problems and review their option granting procedures going forward.Plaintiffs’ attorneys have filed lawsuits based on backdating allegations, claiming breach of fiduciary duty, unjust enrichment, self-dealing, corporate waste and violations of securities laws. The first step is to review historical practices with counsel to identify areas of potential concern.The stock plans of many public companies prohibit the granting of below-market options; other companies disclose in their SEC reports that stock options are granted at market and prepare their financial statements on that basis.The term “backdating” refers to a number of option granting practices in which the reported grant date is different from the date on which the option is actually awarded, resulting in an option that is already “in-the-money” at the time of the grant.