Know Your Options: Mitigating The Risks Of Backdating And Springloading

This article first appeared in Canadian Investment Review, Spring 2007, vol. 20, no. 1.

Backdating options is, at best, indicative of poor governance and, at worst, illegal. The practice could result in director liability, executive terminations and a dramatic decrease in share price. It is vitally important for plan sponsors to understand how option backdating and springloading is done and to know what steps to take to ensure that companies they invest in do not engage in these activities.

There are several ways companies can backdate options. They can use a grant date that precedes the date on which the board approved the grant or they can use a grant date that is "effective as of " a date before the actual grant. Companies can also use a grant date that precedes the date on which all signatures on a written resolution were obtained. Or, they can simply change the date of board resolutions approving the option grant. Equally problematic is to springload options, which involves