Backdating employee stock options
Plaintiffs asserted five sets of claims against Jabil and certain of its senior officers. The Eleventh Circuit agreed with the district court that defendants were shielded from liability by the “safe harbor” provision of the Reform Act for forward-looking statements.First, plaintiffs alleged that defendants made false statements regarding the accounting for employee stock options in Jabil’s periodic SEC filings in violation of Section 10(b) of the Securities Exchange Act of 1934 (“1934 Act”), 15 U. As long as a forward-looking statement is accompanied by meaningful cautionary language, the Court recognized, the speaker is protected from liability irrespective of his state of mind.
Businesses may be tempted to record stock award journal entries at the current stock price. GAAP requires employers to calculate the fair value of the stock option and record compensation expense based on this number.Toutefois, la législation et la pratique tendent désormais à fixer des conditions plus strictes conduisant notamment à fixer le prix d'exercice de l'option à un niveau suffisamment élevé.En français, le terme stock option peut être remplacé, comme le préconisent certains organismes officiels, par les dénominations « option sur titres » (préconisé par la Délégation générale à la langue française) ou « option d'achat d'action » (préconisé par l'Office québécois de la langue française). The company did this, plaintiffs alleged, despite representations by the company in filings with the Securities and Exchange Commission (“SEC”), including proxy statements, that the exercise price of stock options was always “at least equal to fair market value.” The company also represented in its SEC filings that its accounting for employee stock options complied with Accounting Principles Board Opinion No. Disagreeing with the district court, the Eleventh Circuit held that Jabil’s restatement of its financials sufficed to support a finding that the company’s SEC filings contained false statements. This decision represents the most recent effort by the Eleventh Circuit to apply the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (“Reform Act”) and the Supreme Court’s decision in Tellabs, Inc. Plaintiffs alleged that Jabil issued stock options to executives and employees that were “backdated,” such that their exercise or strike prices were lower than the market price of Jabil’s stock on the true dates of their issuance. On appeal, the Court took a slightly broader view of plaintiffs’ allegations, but nonetheless affirmed the dismissal of the amended complaint.In the debate over whether or not options are a form of compensation, many use esoteric terms and concepts without providing helpful definitions or a historical perspective.
This article will attempt to provide investors with key definitions and a historical perspective on the characteristics of options.
For example, if the business estimates that 5 percent of employees will forfeit the stock options before they vest, the business records the option at 95 percent of its value.
Instead of recording the compensation expense in one lump sum when the employee exercises the option, accountants should spread the compensation expense evenly over the life of the option.
Because stock option plans are a form of compensation, generally accepted accounting principles, or GAAP, requires businesses to record stock options as compensation expense for accounting purposes.
Rather than recording the expense as the current stock price, the business must calculate the fair market value of the stock option.
To read about the debate over expensing, see An option is defined as the right (ability), but not the obligation, to buy or sell a stock.