NYT article re yet another problematic option dating practice
By: Cydney Posner
In today's NYT, another practice in option dating is described that is reported to have been widely used by technology companies. The article focuses on Micrel, Inc., which followed a practice of dating an option for a new hire at the lowest price within 30 days following commencement of employment. The purpose of the policy was to address perceived inequities among new hires, but the policy also afforded significant benefits to executives. According to the NYT, Micrel's plan worked by permitting the stock option strike price to "automatically be 'reset' to the new lower, fair market price" in the 30 days after a new employee's start date. Microsoft has acknowledged that it followed a similar pricing method for several years, but ended the practice in 1999.
The article reports, however, that before adopting the practice, Micrel consulted with its accountants, Deloitte & Touche, "to gain assurance that the proposal would not cause the options to be taken as an expense, which would lower earnings and could depress the stock price. Second, it wanted to make sure the plan complied with GAAP." According to the article, Deloitte gave those assurances, then, after almost five years, changed its views and required Micrel to restate. In addition, the IRS sought to collect $51 million in taxes, but subsequently relented.
Micrel is now suing Deloitte. Citing court documents, the article states that Deloitte reviewed the proposal and advised Micrel that its method was in compliance with GAAP and would not have adverse accounting consequences, although the complaint does not specify that the assurances were in writing. The article quotes a consultant who observed that, for "all the major accounting firms, 'the pressure was enormous to win at all costs,...If you think there was pressure to please Ken Lay at Enron, this was a whole other level.' " Another problem cited in the article was the failure by Micrel to disclose its change in pricing practice. The article notes that Micrel's counsel, Morrison & Foerster, "affirmed the terms of the plan in an opinion letter," but it appears from the article that that preceded the change to the 30-day pricing practice.
This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.