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''You'll see a flood of these in the coming months,'' says one observer.
Stephen Taub, CFO.com | US
January 5, 2007
(Correction: This article has been revised to reflect the fact that Sharper Image, as well as the other five companies listed below, cited IRC Section 409A in the relevant public filings.)
At least six companies recently adjusted the exercise price of some stock options held by executives. Citing Section 409A of the Internal Revenue Code, the companies raised the exercise prices to match the current market prices of the stock to avoid any potential taxation of those options.
"No one at risk of these penalties will leave the options unrepriced," Robert Salwen, an executive-compensation attorney, told Bloomberg. "You'll see a flood of these in the coming months."
IRC Section 409A is one of at least three reasons that backdated options can raise corporate tax liabilities. Enacted in 2004 to deal with various perceived deferred-compensation abuses, the statute requires that if options are granted at a discount, the gain must be recognized when the options vest, even if they are never exercised. It carries a big sting: back taxes and interest, plus a standard 20 percent penalty. Although the IRS is still formulating guidance, the income and recognition and penalty rules will generally apply to discounted options granted to any employee, executive or not, if they vested after December 31, 2004, or were not exercised by December 31, 2005.
All six companies, Bloomberg noted, are among the nearly 200 that have disclosed internal or federal investigations into backdating of option grants to boost gains for the option holders. They include:
• Broadcom, which said that three executives were affected by this move: David A. Dull, senior vice president for business affairs, general counsel, and secretary; Bruce E. Kiddoo, vice president, acting chief financial officer, and corporate controller; and Thomas F. Lagatta, senior vice president for worldwide sales.
• UnitedHealth, which named eight executives, including president and chief executive officer Stephen J. Hemsley.
• VeriSign, which named five individuals, including principal financial officer Dana Evan and a former executive officer.
• UTStarcom, which said that its independent directors, as well as four executives including executive vice president and chief financial officer Fran Barton, agreed to amend their previously granted stock options.
• Marvel Technology Group, which also announced that four executives agreed to amend their agreements to reconcile a difference between the recorded grant dates and the actual measurement dates of certain previously awarded stock options: chairman and chief executive officer Sehat Sutardja, executive vice president and chief operating officer Weili Dai, chief technology officer Pantas Sutardja, and vice president of finance and chief financial officer George Hervey.
• Sharper Image, which said it would reprice certain stock-option grants for three executives as a result of its internal review of its option-granting practices.