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Option backdating and its implications

It shows that each type of backdating less likely reflects arm's-length contracting than a desire to inflate and camouflage executive pay.The fact that so many firms continued to secretly backdate after the Sarbanes Oxley Act, in blatant violation of its reporting requirements, suggests recent reforms may have failed to adequately curb such managerial power.

It begins by explaining that most stock options have been granted to executives at-the-money (with a strike price set to the grant-date market price) rather than in-the-money (with a strike price set below the grantdate market price). So, break clauses typically stipulate that they can only be enforced 6 months into the fixed term of a tenancy, no earlier!Here is an example of a break clause (please do NOT use it without seeking legal advice): 7.9 Tenancy Break Clause 7.9.1 In the event that the Tenant shall desire to terminate the tenancy hereby created at or at any time after the end of the first six months thereof he shall give the Landlord not less than one months previous notice in writing of such desire and shall up to the time of such determination pay the rent and observe and perform the agreements and obligations on the tenants part.7.9.2 If the Landlord shall desire to terminate the tenancy hereby created at or at any time after the end of the first six months thereof he shall give the Tenant not less than two months previous notice in writing of such desire then immediately upon the expiration of such notice the tenancy hereby created shall cease and be void.The fact that so many firms continued to secretly backdate after the Sarbanes-Oxley Act, in blatant violation of its reporting requirements, also suggests recent reforms may have failed to adequately curb such managerial power. Introduction Evidence has emerged that several thousand publicly traded firms used hindsight to secretly backdate stock option grants to both executives and nonexecutive employees, boosting the options' value.1 Many of these firms, it turns out, also allowed executives to covertly backdate the exercises of their options, further inflating their option pay.2 Because both types of secret hindsight backdating are illegal,3 over a hundred companies have become the targets of federal investigation, and dozens of managers have been forced to resign.4This Article begins by examining the implications of option backdating for the debate over how managerial pay in publicly traded firms is determined.Essentially, either party can “break” the tenancy before the fixed end date, as long as the correct procedures are followed.

However, it’s important to note, even if the tenancy does include a break clause, the Housing Act 1988 prevents the court from awarding possession to a landlord until six months into the tenancy has passed from the beginning of the agreement, unless the landlord is using one of the seventeen statutory grounds for possession, in which case the landlord has rights to evict the tenant and should serve a Section 8 Notice.

The Judge will then look at the break clause to see if it is valid.

If the Judge is not happy with the clause the landlord will not get possession. The break clause is one of those clauses that can be drafted and interpreted in many ways (apparently).

tenant should have received notice by then), which means the tenant should vacate on July 1st (6 months from when the tenancy began).

If the tenant wants to enforce the break clause, they must also give 2 months notice to the landlord by serving a written notice, known as a tenancy surrender notice.

Thus, secret backdating is better explained by - and provides further support for - the managerial power approach to executive compensation.8The Article then considers the implications of secret option backdating for a second, related debate: Whether the Sarbanes-Oxley Act (SOX) and accompanying stock exchange reforms obviate the need for further corporate governance improvements.