Options give the recipient the right to buy company stock in the future at today's price.At issue is whether people at the companies chose option-grant dates earlier than the actual award dates because the stock prices were low and executives could get shares at a bargain price.
Typically, such lawsuits name a company and its executives and directors as plaintiffs.
D&O insurance When lawsuits and criminal or regulatory investigations target folks in the boardroom and executive suite, a type of insurance policy called directors and officers insurance, often abbreviated as D&O, comes into play.
Some companies and their executives also have been sued in shareholder class actions based on the same allegations.
Recent academic studies suggest many more companies have engaged in backdating stock options and therefore may be vulnerable to backdating- related allegations.
As has been widely reported, more than 80 companies including heavyweights such as Home Depot, Apple Computer, and Barnes & Nobleallegedly backdated stock options or otherwise manipulated options pricing.
Although the practice of backdating stock options itself is not necessarily illegal, it may lead to a host of tax and regulatory liabilities.
Defending these investigations and lawsuits will be costly, and any resulting liabilities threaten to be substantial.
Introduction In the past year, many corporations have faced intense scrutiny from regulators, prosecutors, shareholders, and plaintiffs’ attorneys related to the so-called backdating of stock options for corporate executives.
exemplifies the potential risks faced by in-house corporate counsel. Indeed, the SEC has indicated that, consistent with its heightened concern since the enactment of the Sarbanes-Oxley Act in July 2002 with the role of lawyers as “gatekeepers” in preventing corporate fraud, it is closely monitoring the role of general counsel in granting stock options. Directors’ and Officers’ (“D&O”) liability policies offer a potentially valuable source of funding for defending against and settling these claims.
Thus, when faced with allegations of improper practices by in-house counsel regarding stock options, policyholders should carefully review the terms of their policies to ensure that they take all possible steps to preserve and maximize coverage.
As with any scandal, backdating has triggered shareholder lawsuits, although so far they have been a trickle rather than a torrent.