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Sec rules backdating stock options

The SEC maintains that where grants are made immediately prior to a positive announcement, a failure to discuss the timing and value of the grant in SEC filings is a disclosure violation. The primary issues facing companies are: Accounting Issues.Until very recently, most companies accounted for stock option grants under APB 25.

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Securities and Exchange Commission on Thursday dropped its informal probe into stock options-granting practices at semiconductor firm Xilinx Inc., swayed by a recent presentation by outside counsel Skadden Arps, the company said.In several cases to date, investigations by the SEC or the Department of Justice are reported to have led to resignations or firings of senior management. Companies facing suspicions about their option grant practices can expect shareholder lawsuits, most likely in the form of derivative claims and/or class actions under the federal securities laws. Because every company has a different history and set of corporate practices, no one series of actions is necessarily appropriate for all.We recommend that you contact your outside legal counsel promptly to discuss the issues outlined here and to formulate a plan of action for your company.As a result, the improper dating of options may require a company to restate its financial statements for prior years to reflect additional compensation expense.Because compensation expense is recorded over the vesting period of the option (generally four years), a single occurrence of improper dating could result in the restatement of several years of financial statements.These circumstances do not appear to be the focus of the recent articles and research reports, and their possible consequences are currently subject to considerable debate.As discussed below, however, it is advisable for all public companies to consult with outside counsel in order to discuss the issues outlined here and to formulate a plan of action going forward. Thus far, recent government investigations appear to have centered around backdating of grants to executive officers.Under this method of accounting, if a stock option was granted at the money, then no compensation expense was recorded.However, if the exercise price was lower than the fair market value of the stock on the date of grant, then the company was required to record compensation expense equal to the difference between the exercise price and the fair market value at the date of grant.Published reports have highlighted some instances in which a companys stock price increased substantially shortly after the reported grant date, suggesting that backdating may have occurred.A number of commentators have suggested that there may be other circumstances under which option grant dates may be open to question, including grants made by use of unanimous written consents.

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