Spread of options backdating

21-Jul-2016 18:30

Code Section 409A Code Section 409A, which was adopted as part of the American Jobs Creation Act of 2004, enacted a major overhaul to the tax treatment of deferred compensation, including discount stock options ( stock options with in-the-money exercise prices at their date of grant).

Stock options that have been back-dated in order to set an exercise price for the option that is lower than the fair market value of the stock on the actual date of grant will generally run afoul of Code Section 409A to the extent they were (i) granted after October 3, 2004, (ii) granted before October 4, 2004, but not vested as of December 31, 2004, or (iii) materially modified after October 3, 2004.[1] As mentioned above, discount stock options are treated as a form of deferred compensation subject to Code Section 409A.

Section 409A requires that discount stock options have a fixed exercise date.

As a result, the holder of discount stock options that lack a fixed exercise date will be subject to a 20% penalty tax, in addition to regular income tax, plus possible interest and other penalties.

Attorney Steven Reich also clarified answers Mc Kelvey gave in a July meeting, arguing that Mc Kelvey did not know backdating was illegal.Monster issued a statement Monday disclosing that, through a lawyer, Mc Kelvey declined to be interviewed by a special committee of the board in a meeting that had been set for Monday.He also would not assure the board that he would appear at a later date.If the exercise price of a discounted option is increased to the fair market value of the stock on the original grant date of the option (see paragraph (1) above), and the company decides to compensate the option holder in 2006 for the lost economic benefit resulting from such increase in the option’s exercise price, the cash or stock bonus must be subjected to a vesting schedule.The cash or stock bonus could become vested or payable during 2006.

Attorney Steven Reich also clarified answers Mc Kelvey gave in a July meeting, arguing that Mc Kelvey did not know backdating was illegal.Monster issued a statement Monday disclosing that, through a lawyer, Mc Kelvey declined to be interviewed by a special committee of the board in a meeting that had been set for Monday.He also would not assure the board that he would appear at a later date.If the exercise price of a discounted option is increased to the fair market value of the stock on the original grant date of the option (see paragraph (1) above), and the company decides to compensate the option holder in 2006 for the lost economic benefit resulting from such increase in the option’s exercise price, the cash or stock bonus must be subjected to a vesting schedule.The cash or stock bonus could become vested or payable during 2006.Current IRS guidance is not clear with respect to the amount that will be subject to the additional 20% penalty tax.