Conceivably, the most benign stock option plan would provide directors with the discretion to set the exercise price of options as they saw fit, even if that meant that options could be granted at below-market-value prices.Even with this added "protection," however, directors and officers may still be exposed to potential liability.In the context of stock option backdating, however, following the protocols contained in a stockholder-approved option plan may prove problematic, especially when those plans require a strike price to be set at no less than the fair market value on the date on which the option is granted by the board.
With the discovery of stock option backdating, directors and stockholders are not necessarily on the same footing since the backdating of options bestows upon those receiving them "in the money" grants.
Stock option backdating, of course, refers to the practice of publicly traded companies issuing stock option grants retroactively in order to coincide with low points in the company's stock price.
Against this backdrop, several key factors in the inquiry into possible corporate malfeasance relating to stock option backdating have emerged.
Most of the issues addressed by the Court of Chancery include: (1) an examination of the type of stock option grants permitted through the company's stock option plan; (2) an assessment of the knowledge possessed by the directors and officers responsible for approving the issuance of backdated stock options; (3) an inquiry into the vesting time period, if any, accompanying the stock options; and (4) an analysis of the adequacy of the company's disclosures to regulatory agencies and the company's own stockholders relating to the issuance of stock options.
Whether or not stock option practices consistent with this type of low-risk plan evade examination depends largely upon the disclosures made in public filings and, thereby, to the company's stockholders.
Since it appears that most stock option backdating took place under the cover of darkness, a company's failure to adequately inform its own stockholders about its stock option practices inevitably negates the protections afforded by a stock option plan that permits below-market-value pricing for stock options.
What Are The Terms Of Any Stockholder-Approved Stock Option Plan?
A primary focus in adjudicating the validity of stock option backdating includes the mechanism by which directors have authority to grant various stock options.
Spawned by the research conducted by University of Iowa professor, Dr.
Erik Lie, and the article that first appeared in The Wall Street Journal in March of 2006, stock option backdating has become an increasingly important issue for all public companies.
Another consideration in evaluating the nuances of a stock option plan involves the timing for issuance of stock options.