Clearly, such a non-discretionary plan would allow the recipients of the option grants to enjoy the upside of a deflated strike price while at the same time ensure that they participated in any down swing of the stock price. Of utmost importance in determining the potential liability of those individuals responsible for approving backdated stock options is the knowledge possessed by those accused of involvement, primarily the company's officers and directors.
In circumstances where directors approve, with input from trusted advisors, the granting of options without knowledge that they are being backdated in violation of a stockholder-approved stock option plan, any liability for breach of fiduciary duty remains suspect.
What Are The Terms Of Any Stockholder-Approved Stock Option Plan?
A primary focus in adjudicating the validity of stock option backdating includes the mechanism by which directors have authority to grant various stock options.
With the discovery of stock option backdating, directors and stockholders are not necessarily on the same footing since the backdating of options bestows upon those receiving them "in the money" grants.
Stock option backdating, of course, refers to the practice of publicly traded companies issuing stock option grants retroactively in order to coincide with low points in the company's stock price.
Remarkably, the number of internal or federal investigations currently underway tops 200, with more than half of those companies acknowledging that they must restate their financial results.
In addition to those ongoing investigations, a new crop of derivative and class action complaints has sprung up asserting allegations of breaches of fiduciary duty by directors and officers of companies involved in the backdating scandals.
But what factors are the courts considering when evaluating these derivative and class action complaints?
Specifically, what behavior on the part of board members seemingly makes a difference?
In the context of stock option backdating, however, following the protocols contained in a stockholder-approved option plan may prove problematic, especially when those plans require a strike price to be set at no less than the fair market value on the date on which the option is granted by the board.