If a company grants options on June 1 (when the stock price is 0), but backdates the options to May 15 (when the price was ) in order to make the option grants more favorable to the grantees, the fact remains that the grants were actually made on June 1, and if the exercise price of the granted options is , not 0, it is below fair market value.
Thus, backdating can be misleading to shareholders in the sense that it results in option grants that are more favorable than the shareholders approved in adopting the stock option plan.
Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.
This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.
However, if the company granted options with an exercise price below fair market value, there would be a compensation expense that had to be recognized under applicable accounting rules.
Academic researchers had long been aware of the pattern, exhibited by some companies, of share prices rising dramatically in the days following grants of stock options to senior management.
May 22-23, 2007 * New York June 27-28, 2007 * Chicago Reed R.
Kathrein - Partner Hagens Berman Sobol Shapiro LLP 715 Hearst Avenue, Suite 202 Berkeley, CA 94710 Telephone: (510) 725-3030 Facsimile: (510) 725-3001 Cell: (415) 683-8566 Email: [email protected] NOTE: The information contained in and documents accompanying this e-mail transmission are confidential and/or legally privileged materials from the law firm of Hagens Berman Sobol Shapiro LLP.
For instance, public companies generally grant stock options in accordance with a formal stock option plan approved by shareholders at an annual meeting.
Many companies' stock option plans provide that stock options must be granted at an exercise price no lower than fair market value on the date of the option grant.