Backdating employee stock options tax implications


26-Dec-2018 10:19

This article will attempt to provide reasons why this issue is important, why civil and criminal authorities are investigating, and why it is critical that public companies who issued options over the past...

The practice of “backdating” stock option grants has recently captured the attention of regulators, prosecutors, the plaintiffs’ bar, shareholders and the media.

Exceeding the authority set forth in a shareholder-approved plan may also run afoul of stock exchange rules requiring shareholder approval of equity-based compensation.

Civil and criminal authorities are investigating the option granting practices of many companies.

Under Section 409A, the recipient could be subject to acceleration of taxable income and additional taxes and penalties, and the company could be subject to special tax withholding and reporting requirements.

Options granted at less than fair market value or without proper board or committee approvals may violate the terms of the applicable option plan, with the result that options could be invalid.

An option granted at less than fair market value will also not qualify as “performance based compensation” and thus must count toward the

This article will attempt to provide reasons why this issue is important, why civil and criminal authorities are investigating, and why it is critical that public companies who issued options over the past...The practice of “backdating” stock option grants has recently captured the attention of regulators, prosecutors, the plaintiffs’ bar, shareholders and the media.Exceeding the authority set forth in a shareholder-approved plan may also run afoul of stock exchange rules requiring shareholder approval of equity-based compensation.Civil and criminal authorities are investigating the option granting practices of many companies.

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This article will attempt to provide reasons why this issue is important, why civil and criminal authorities are investigating, and why it is critical that public companies who issued options over the past...

The practice of “backdating” stock option grants has recently captured the attention of regulators, prosecutors, the plaintiffs’ bar, shareholders and the media.

Exceeding the authority set forth in a shareholder-approved plan may also run afoul of stock exchange rules requiring shareholder approval of equity-based compensation.

Civil and criminal authorities are investigating the option granting practices of many companies.

Under Section 409A, the recipient could be subject to acceleration of taxable income and additional taxes and penalties, and the company could be subject to special tax withholding and reporting requirements.

Options granted at less than fair market value or without proper board or committee approvals may violate the terms of the applicable option plan, with the result that options could be invalid.

An option granted at less than fair market value will also not qualify as “performance based compensation” and thus must count toward the $1 million executive compensation deduction cap under Section 162(m) of the Internal Revenue Code.

million executive compensation deduction cap under Section 162(m) of the Internal Revenue Code.

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Options granted as of the date of employment acceptance are also troublesome if the plan does not permit grants to non-employees or if the additional tax and accounting issues relating to grants to non-employees are not adequately addressed.A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.This problem occurs most often when boards or committees act by unanimous written consent but there is a delay in the receipt of all of the signed consents.If the exercise price is set when the pool is authorized by the board or committee but the allocation and actual grants occur later (when the stock price has increased), backdating issues may arise.

Option grants to new employees have their own set of backdating issues.

The discovery of past backdating practices may raise issues as to the adequacy of the company’s internal controls and disclosure controls and procedures.



In 19, significant changes were made to the tax treatment of employee stock options in Canada. Although designed to increase the use of stock.… continue reading »


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