Below are our recommendations with respect to oversight of stock option grant and other equity compensation programs.Recently, media and regulatory attention has been directed at two types of potential problems with respect to option grant practices.This greater individual tax liability also could cause the company to have failed to comply with applicable tax withholding rules.§ If the option plan does not permit below market grants, then the option grants could be considered plan amendments, in which case the company could be in violation of applicable stock exchange rules that require shareholder approval of certain plan amendments.§ Develop procedures that provide for consistency in determining the fair market value of options.
§ Incorporate any existing or developed procedures into the company’s general disclosure controls and procedures, and get approval of the procedures from the company’s auditors.
One example of the targets of these investigations is where a company grants stock options immediately prior to the issuance of a positive earnings report or other public notice of good news about the company, where the earnings report or other news is expected to result in an increase in the value of the company’s stock (referred to as "spring loading").
A variation on this practice is to intentionally delay a stock option grant until after the public disclosure of bad news about the company in order to provide the option holder with the benefit of a lower stock price (referred to as "bullet dodging").
§ Recipients of stock options may have violated their reporting obligations under Section 16 of the Securities Exchange Act of 1934.
§ It is likely that insurance carriers of director and officer insurance policies will require representations about a company’s option grant practices in connection with policy renewals.
Chief executive officers and chief financial officers, who are required to certify company financial statements, may face particular exposure.