Is Spring-loading Wrong?

Is the Pope Catholic? Speaking before a conference sponsored by the International Corporate Governance Network, Atkins asked, "Isn't the grant a product of the exercise of business judgment by the board?" He explained that in deciding to grant options before positive news, the directors may determine that they can grant fewer options and the recipient could get the same economic effect when the stock price rises.

"Who are we to second-guess that decision? Why isn't that decision in the best interests of the shareholders?" asked Atkins, who added that it is difficult to predict the stock price change of an upcoming event and the future direction of that stock over multiple years until the options recipient is vested in those options.

Fred Lipman, a partner at the law firm Blank Rome, believes that spring-loading is legal as long as the compensation committee awarding the options knows the same information as the recipient and the company discloses to shareholders that it does not withhold granting options when undisclosed, positive company information is pending

Given the confusion and uncertainty around this practice, it's easy to see why the SEC is targeting backdating cases first, notes Todd Fernandez, a senior research analyst at Glass Lewis who spoke with CFO.com before today's hearing. Spring-loading cases would be much more difficult to prosecute, explains Fernandez. The onus of trying to justify that inside information was material enough that the company or the options recipient should have known the stock would react positively is difficult. "It's not an open-and-shut case," he said.

Now why isn’t any of this surprising?

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