Options backdating law
Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly lower share price.
It is suspected that these situations are not a coincidence and that the board or executives were granted options based on a past date in order to make these options more profitable.
Law360, New York (April 29, 2010, PM EDT) -- The short answer is that there is nothing wrong with backdating stock options — if appropriate procedures are followed and the transactions are properly accounted for and disclosed.
In a backdated situation, however, the options would be granted today (August 16), but their listed day of granting would be June 1 in order to give the options a lower strike price.
This practice is legal when properly recorded as a non-cash corporate expense.
Then why have more than 170 companies been investigated since 2007 by the U.
Due to the implimentation of the Sarbanes-Oxley Act of 2002, the rule has been changed and companies are now required to report the granting of options within two business days, which effectively has removed this loophole.
An option's strike price is usually chosen by taking the stock's closing price on the day that the option was granted, calculating an average of the day's high and low prices or by taking the closing price from the previous day's trading.
For example, suppose that it is August 16, 2006, and the closing share price of XYZ Corp. On June 1, 2006, XYZ Corp.'s stock price was at a six-month low of $25.