Board Resolutions Ratifying Retroactive Equity Grants For Historical Contribution
Board resolutions ratify retroactive equity by establishing current fair market value grant dates while crediting past service through historical vesting start dates.
option backdating
Meaning
Assigning an earlier date to an equity grant than the day the allocation decision was made creates a discrepancy in the financial record. The practice of option backdating was used to provide immediate value to employees by setting the strike price at a historical low point. This method obscures the true cost of compensation to the shareholders and the public.
It stops being a common practice where strict disclosure rules require reporting of grants within a few business days.
Grant Misalignment
Assigning a retrospective date alters the strike price to a level that is already in the money. This provides a gain to the recipient that was not earned through stock price appreciation after the grant. The cost is borne by the other shareholders whose ownership is diluted by the lower strike price.
It represents a transfer of value that is not reflected in the performance of the company.
Compliance Risk
Failure to report the actual grant date leads to violations of tax and securities laws. Regulatory agencies impose penalties when they discover that dates were changed to benefit insiders at the expense of the company. This creates a liability that can damage the reputation of the firm and its leaders.
Disclosure Cost
Restating financial statements to correct for the misdated grants requires significant resources and audit fees.