Backdating and spring loading
In the last year, numerous cases of backdating stock options have come to light.Apple has been the most high profile company to be embroiled in the scandal.These cases are likely to cause companies to consider changing the process by which they grant equity-linked awards, including, possibly, modifying plan terms to specifically give directors more discretion or, possibly, less latitude in determining the strike price of option grants. The Tyson court stated that "[a] director who intentionally uses inside knowledge not available to stockholders in order to enrich employees while avoiding shareholder-imposed requirements" contained in stock incentive plans cannot "be said to be acting loyally and in good faith." But, according to the decision, it was the deception involved, not the "in the money" nature of the option, that is actionable and made the business judgment rule unavailable.For example, we may see plans amended to permit grants only during a company's "trading window." The Cases A summary of the key facts of the Tyson and Ryan cases and the courts' analyses follows. The Tyson court said that it was "difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at 'market rate' and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more." Ultimately, Tyson may be reversed, but even if permitted to stand, its holdings will not necessarily result in the imposition of personal liability on the members of the Tyson compensation committee if litigated to conclusion., relating to potential director liability in the highly charged area of option pricing, particularly "spring-loading" and "backdating." While each case was decided in response to a motion to dismiss where all facts alleged must be considered to be true, and the decisions do not constitute findings of actual liability, unless they are reversed on appeal or superseded, they are likely to add to the supercharged atmosphere in which directors of public companies are making decisions about granting equity-linked incentive awards.The cases will also be of concern to the roughly 150 companies presently involved in options-related investigations.In his decision, Chancellor Chandler stated, “It is difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted a “market rate” and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more”.
Unfortunately, it circumvents the law and the original intent of the option.Board Directors better get ahead of this wave or risk lawsuits and personal liability.OTHER ARTICLES BY Keith Kefgen, New York CFO Compensation in the Gaming Industry Can We Have Compassionate Leaders In A Dog-Eat-Dog World?We have proven that over time, executives are actually better off using this process.Trying to time the market is a risky endeavor and manipulating it is even worse.
Spring loading options is the practice of granting options just prior to issuing good news (financial performance, merger/acquisition, positive news regarding a regulatory approval and so forth).