Backdating and spring loading stock options

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Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.

Spring-loading options is often a controversial practice.

Because option strike prices tend to be derived from the grant day's stock price, on the day of granting the option should be "at the money".

In the first decision, involving allegations of backdating at Maxim Integrated Products Inc., the Chancellor recognized that stock option backdating is inherently deceptive and that “[a] director who approves the backdating of options faces at the very least a substantial likelihood of liability” for breaching the fiduciary duty of loyalty.

In the second case, involving allegations of stock option spring-loading at Tyson...

In essence, the revision enabled companies to increase executive compensation without informing their shareholders if the compensation was in the form of stock options contracts that would only become valuable if the underlying stock price were to increase at a later time.

“What I’d tell a client is, ‘You have a very serious fraud problem, but I can help you,’ ” said David Becker, a former SEC general counsel who is now a partner at Cleary Gottlieb, when Grundfest questioned him on the legality of bullet dodging.

Law360, New York (February 15, 2007, AM EST) -- On Feb.

6, 2007, the Delaware Court of Chancery issued two significant decisions in derivative cases involving allegations of stock option backdating and spring-loading.

However, others claim that the effects of spring loading are minimal, as most option grants have a vesting period, which prevents the holder from realizing his or her position for a period of time.

In this case, the option might be out of the money long before the investor can exercise it.

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