What is wrong with backdating stock options
For a shorter piece with a few practical tips see Backdating – it’s illegal isn’t it?
Setting aside such issues, avoiding unwanted side effects of backdating contracts can be tricky, especially when the purported effective date of an agreement is several months before the date it was actually signed, as can be seen in involves the ownership of a promissory note that was made to a bank in connection with a loan.
The facts are a bit complicated, involving circumstances surrounding the failure of a bank and transactions in the bank’s loans preceding the failure as well as transactions of the FDIC as the bank’s receiver.
Here’s a simplified timeline: FH Partners made a demand on the debtor for payment of the loan and eventually sued the debtor and guarantors.
The trial court granted the defendants summary judgment, holding that FH Partners didn’t own the loan and so it couldn’t enforce it.
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.
For those with an hour to kill thinking about the issues, Jeffrey Kwall and Stuart Duhl wrote an excellent article on backdating that was published in Business Lawyer in 2008.
Due to this ambiguity in the contract documents, the trial court was permitted to look at the evidence of the parties’ intent outside of the documents, and it found that the FDIC didn’t acquire an interest in the loan until June 2009, regardless of the stated effective date in the main agreement.
It’s not unusual for parties to a contract to want the written agreement to cover a period before it’s actually signed.
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.
As to the first issue, the transaction between the FDIC and Weatherford couldn’t have retroactive effect unless the parties showed a clear intent for the transaction to be retroactive.The court stated the general rule that “a written contract becomes binding when it is finally executed or delivered, unless a different intent appears.” Although the face of the main agreement in the FDIC/Weatherford transaction expressed an intended effective date of November 7, 2008, ancillary documents signed in connection with the transaction weren’t backdated, and the main agreement didn’t explain why it was backdated.