GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
National Association of Corporate Directors
October 5, 2006
Paul BerkowitzShareholderGreenberg Traurig, P.A.
2GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Dead People Can Vote in Chicago and, Evidently Receive Options in Bethpage, NY.
3GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Setting the Stage• Over 100 companies are currently under
federal investigation for backdating or otherwise manipulating stock option grants.
• Between 1990 and 2003 the average number of shares set aside for equity grants increased from 8% to over 17% of outstanding shares.
• The annual burn rate grew from under 1% to more than 2.5%.
• The dotcoms exceeded these standards.
4GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
A New Vernacular• Backdating – retroactively moving back the
date of grant.
• Bullet-Dogging – granting options immediately following the release of bad news.
• Discounted Options – issuing below fair market value.
• Exercised Backdating – retroactively moving the date of exercise to an earlier or later date with a lower stock price.
• Spring-Loading – granting options shortly before good news is announced.
5GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
The Problems
• Restatements
• Prior Disclosures may be incorrect
• Civil Litigation
• Tax Problems – 162(m); ISOs; 409A
6GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Letter of September 19, 2006 from Conrad Hewitt, Chief Accountant, Securities and Exchange Commission to
Committee on Corporate Reporting, Financials Executive International and American Institute of Certified Public
Accountants
• Under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” the relevant determination is the “measurement date” which is defined as “the first date on which are known both (1) the number of shares that an individual employee is entitled to receive and (2) the option or purchase price, if any.”
• Short delays in completing the administrative procedures to finalize a grant do not result in an accounting consequence.
7GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• Delegation Issues•Obtaining oral authorization and
subsequently completing the documents evidencing the award at a later date, or
•Delegation of authority to a member of the Compensation Committee or management within specific parameters.
•What was the Company’s pattern; for example, did it retract awards when the price dropped or did the Company treat grants as fixed and unchangeable?
•Is it a valid grant – for example, the plan may preclude grants that are in-the-money.
8GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• Authorizing an aggregate number of shares and leaving to management allocations to individuals- pursuant to paragraph 10(b) of Opinion 25, no measurement date occurs until “the number of shares that an individual employee is entitled to received” is known.
• One solution is to fix the number of options based on levels of employment within the organization.
9GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• Changes in the list of recipients were the number of options allocated to each recipient requires a conclusion that either:
•The list that was prepared on the award date did not constitute a grant in which case the measurement date for the entire award will be delayed until a final list has been determined; or
•The list that was prepared on the award approval date constituted a grant, in which case any subsequent changes to the list would be evaluated to determine whether a modification (such as a re-pricing) or cancellation has occurred.
10GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• Down side protection results in variable accounting.
• Granting of Options prior to commencement of employment – the measurement date is delayed until the commencement of employment.
• Incomplete or missing documentation – the message is do the documentation contemporaneously and preserve it carefully.
11GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• Materiality = Restatement (even non-material, but intentional actions require restatements)
• The restatements are required for all of the effective years.
• The Compensation Discussion and Analysis would require disclosure of a “program, plan or practice to select option grant dates for executive officers and coordination with the release of material non-public information”
12GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• One solution•Systematized Grant Practices
•Use a Single Annual Grant Date
•Make the Grant Date within a window period.
13GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Paul BerkowitzShareholderGreenberg Traurig, P.A.1221 Brickell AvenueMiami, FL 33131 [email protected] 305-579-0685