What is wrong with backdating stock options

11-Mar-2020 01:35

In the legal profession, information is the key to success.

You have to know what’s happening with clients, competitors, practice areas, and industries.

It would not be uncommon for there to be a lapse of days or even weeks between the time commercial terms are agreed and the date of final contract execution.

Even for a simple document such as a Non-Disclosure Agreement (or Confidentiality Agreement), the parties may legitimately want the document to take effect from an earlier date.

In the US, however, there seems to be have been much more consideration of the issue (at least according to my Google search results).

Despite recent controversies surrounding the backdating of executive stock options, the general attitude in the US is that backdating is not wrong (or right), per se.

In this article, the author writes: “Backdating by itself is not generally, at least with respect to private agreements, illegal.

Rather, it is the use of the backdated documents by the parties or their counsel that may violate the law.” The US approach seems to be founded on the principle that parties to an agreement (or deed) are free to agree that the document is to take effect prior to the date of execution – this is often denoted by dating the document “as of” the earlier date. Bradley Real Estate Trust, the US Court of Appeals (7th Cir.

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This is reflected in the Linklaters article Execution of Documents: Five Common Questions Answered, which offers the following advice for in-house lawyers: “(i) contracts may only be backdated, absent fraud, in circumstances where an original form has been lost or where terms have been fully agreed but signatures have been left to a later date and (ii) deeds may never be backdated.” Unfortunately, the article offers scant authority, and a search on Google reveals little else on the subject from the commonwealth world.Backdating, on the other hand, pretends that the strike price was actually set earlier than it was, or at some time when the share price was lower than on the day it was actually granted.It gives the manager instant extra profits on the options.The commonwealth-trained (and more prudent) approach would be to insert the date only when the last party has signed and to use a date no earler than the date of that last signature.

This should cover the majority of cases that come across corporate counsel’s desk.

This practice is legal when properly recorded as a non-cash corporate expense.