Back dating of stock

The exercise price of a discounted option can be increased by December 31, 2006 to equal (or exceed) the fair market value of the stock on the original grant date of the option.If such an increase to the exercise price of a discounted option is made during 2006, the vested portion of the option may be exercised in 2006 so long as the option holder is not compensated for the exercise price increase, except as described in paragraph (2) below.

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In light of the Enron, Worldcom, option back dating, government bailouts/nationalizations and Madoff scandals, do you think U. equity markets are cleaner and more reliable than stock markets in the rest of the world?

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The fixed exercise date may be any date prior to expiration date of the applicable option.

The Proposed Regulations under Code Section 409A provide further that the fixed exercise date can be an entire calendar year.

To any extent a discount option has been exercised, there may not be a way avoid the penalties of Code 409A. Incentive stock options ("ISOs") are required to be granted at an exercise price that is no less than the fair market value of the stock on the date of grant.

Therefore, a back-dated option that has been granted at a discount would violate one of the requirements that apply to ISOs.

It is expected that the further guidance from the IRS will clarify the application of the 20% penalty tax to discount options.

(1) Increase the Exercise Price to FMV as of the Grant Date.

Some companies already subject to litigation led by the law firm include Forrester Research, Inc., Staples, Inc.

and real estate services giant First American Corporation.

Any cash payable pursuant to a vesting schedule would be subject to Section 409A unless the cash will be paid within two and one-half months after the calendar year in which the right to the cash payment vests.(3) Elect a Fixed Exercise Date.

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