Taxes and the backdating of stock option exercise dates

Posted by / 07-Sep-2019 17:04

Taxes and the backdating of stock option exercise dates

An option granted at less than fair market value will not qualify as an incentive stock option and therefore generally will be subject to income tax and withholding requirements upon exercise of the option.An option granted at less than fair market value will also not qualify as “performance based compensation” and thus must count toward the

An option granted at less than fair market value will not qualify as an incentive stock option and therefore generally will be subject to income tax and withholding requirements upon exercise of the option.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.Grants to new employees based on inaccurate employment commencement dates are troublesome.

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An option granted at less than fair market value will not qualify as an incentive stock option and therefore generally will be subject to income tax and withholding requirements upon exercise of the option.

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.

Grants to new employees based on inaccurate employment commencement dates are troublesome.

Options granted as of the commencement of employment based on the market price as of the date of acceptance may be problematic if the plan does not permit below-market grants or the grant is not treated as a discounted option for accounting and tax purposes.

The stock plans of many public companies prohibit the granting of below-market options; other companies disclose in their SEC reports that stock options are granted at market and prepare their financial statements on that basis.

The term “backdating” refers to a number of option granting practices in which the reported grant date is different from the date on which the option is actually awarded, resulting in an option that is already “in-the-money” at the time of the grant.

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

Companies and individuals could face monetary penalties, restitution and disgorgement under the securities laws and the Internal Revenue Code.

million executive compensation deduction cap under Section 162(m) of the Internal Revenue Code.Grants to new employees based on inaccurate employment commencement dates are troublesome.

Plaintiffs’ attorneys have filed lawsuits based on backdating allegations, claiming breach of fiduciary duty, unjust enrichment, self-dealing, corporate waste and violations of securities laws. The first step is to review historical practices with counsel to identify areas of potential concern.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.Even though no documents are backdated and there may be no intent to select a lower exercise price, backdating issues may arise if the stock price increases before the corporate formalities have been completed.It could also lead to delays in filing financial statements while the magnitude of the problem is determined.Adverse tax consequences may result from option backdating practices.

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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.

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