Corporate governance stock option backdating

22 Feb

The granting of stock options to executives and directors began as a method by which a company could award those that managed its future.

This concept created more of a level playing field between directors and stockholders since, with the granting of stock options, both directors and stockholders were working toward the same end - namely, overall success of the company.

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.

Without evidence of the director's knowing participation in what amounts to a violation of the stock option plan, hopeful plaintiffs might be unable to overcome this very difficult burden.

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Given the suspect nature of grants of this type, it is not at all surprising that the stock option backdating scandal of 2006 continues to thrive well into 2007.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.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.