Backdating stock scandal

Posted by / 18-Nov-2020 01:29

The appellate court then considered whether, assuming that the FDIC/Weatherford transaction was retroactively effective (which it wasn’t), the retroactivity of that transaction had any legal effect on the transaction between the FDIC and FH Partners.FH Partners was unable to cite to any authority “for the proposition that a retroactive effective date in one contract can be construed to have an automatic retroactive effect on a separate contract,” which would probably have been fatal to its case.Improper backdating occurred when stock-option grants to executives were timed to match yearly or quarterly lows in their company’s share price, but were often reported to shareholders at a higher exercise price.That concealed the additional executive pay and overstated financial results.On appeal, the Missouri Court of Appeals, Western District agreed.FH Partners argued on appeal that, although the FDIC didn’t own the loan on December 16, 2008, the FDIC’s backdated transaction with Weatherford remedied the problem retroactively.

The scandals also changed how stock options are granted, making them less popular as a form of compensation and pushing companies to become stricter about their procedures, according to Robin Ferracone, chief executive of compensation consultant Farient Advisors.

There are any number of contexts where this comes up — some legitimate and others not exactly aboveboard — but the logistics of negotiating and signing contracts are such that the issue is unavoidable.

(Jason Mark Anderman illustrates the logistics problem well in this comment to a backdating post on Ken Adams’s blog.) There’s nothing inherently illegal or unethical about backdating contracts, although backdating can certainly be both unethical and illegal, depending on the situation.

The appellate court affirmed the trial court and stated: The law does not support the blanket conclusion that a retroactive effective date in a contract is only enforceable when the evidence demonstrates that the parties had agreed to the material terms of their contract as of the retroactive date.

However, where a contract is ambiguous with respect to its effective date, the absence of an explanation for a retroactive effective date, and evidence that the parties had not agreed to the material terms of their contract as of the purported retroactive effective date, are relevant considerations in resolving the ambiguity.

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We cannot conclude, therefore, that in resolving the inconsistency between the FDIC/Weatherford Agreement and the Termination of Participation Agreements, the trial court erroneously relied on these uncontested facts to find “a lack of mutual assent” with respect to a November 7, 2008 effective date.

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