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Although backdating is not an illegal practice in and of itself, the grant of backdated options can create a host of unintended consequences.For starters, the backdating of options can have significant accounting implications (regardless of whether the options were accounted for before the company became subject to FAS 123R and regardless of whether the backdating was intentional).
§ If the option plan does not permit below market grants, then the option grants could be considered plan amendments, in which case the company could be in violation of applicable stock exchange rules that require shareholder approval of certain plan amendments.
The first involves the actual timing of option grants and the second involves the procedures for pricing stock options.
The Securities and Exchange Commission and the Department of Justice have initiated several investigations into situations where significant option grants were made and priced at times when the stock’s fair market value (and, so, the exercise price of the options) was low relative to the stock’s value at other times during the period during which the grants were made.
Oftentimes under state law, written committee consents are not effective until signed by members of the committee.
This has resulted in a number of inadvertent cases of backdating where the grant was inadvertently made before the written consent was executed by all committee members. § Develop appropriate procedures for communicating material terms of option grants to recipients.