After Stock Has Been Issued, Where Are the Effects Seen?
SAN FRANCISCO (MarketWatch) -- As Apple Inc. convenes its annual shareholders' meeting Thursday, a brewing scandal over the backdating of stock options could mar what otherwise should be a celebration of the best year ever for the maker of PCs and consumer electronic devices.
Shares of Apple AAPL,
Those results came during what is typically a weaker quarter for the company because it follows the traditionally strong year-end period.
But when CEO Steve Jobs and other executives meet shareholders at the company's headquarters in Cupertino, Calif., the nearly evangelical fervor among Apple acolytes may be tempered somewhat by recent developments in the months-long saga of the company's stock-option investigation.
A group of activist shareholders has put a proposal on the company's proxy statement. The proposal calls for the company to set grant dates for stock options during a given fiscal year ahead of time. It also mandates that options granted to senior executives be given an exercise price that is equal to the average opening and closing prices of Apple stock on the day that the options are given.
The proposal is sponsored by New York-based Amalgamated Bank LongView Collective Investment Fund and the Connecticut Retirement Plans and Trust Funds, of Hartford, Conn. The two funds own a combined total of about 796,000 shares of Apple's stock.
"In our view, corporate efforts to game the timing of options can distort a core purpose of options, which is to motivate executives to improve long-term performance for the benefit of all shareholders," the proposal read.
Apple is opposing the measure. In its proxy statement, the company argues that the proposal is unnecessary and doesn't apply to Apple's current equity-compensation practices. The company also pointed out that it hasn't granted any options to senior management since 2003, using instead restricted stock grants that don't have an exercise price.
"Even if Apple decides to grant stock options to senior executives in the future, the Board believes that the proponent's restrictive approach is not necessary to protect the interests of Apple shareholders," the company wrote in its proxy.
Proxy Governance Inc., a proxy advisory firm, is also against the proposal. In a report Monday, the firm said that while it has "serious concerns" about the oversight of Apple's board regarding prior option practices, it believes the root of the problems lies with individuals and not the company's policies.
"No number of controls and process improvements can prevent every instance of willing and intentional fraud," Proxy Governance said, in a statement.
Investigation turns up finger-pointing
The finger-pointing regarding what and when Jobs knew about the backdating of thousands of Apple options has become an irritant to the company, and a cause for some large shareholders to call for reform in how Apple grants stock options to its senior executives.
The controversy stems from an internal investigation into the backdating of 6,400 grants that were made between 1997 and 2001. In December, Apple said that it would take an $84 million charge to account for the improper backdating of the options in question, and that it would restate its results from 2003 to 2006.
At the time, the company laid blame for the problem at the feet of two executives -- former CFO Fred Anderson and former general counsel Nancy Heinen -- who had previously left the company.
Regarding Jobs, Apple said in a statement that while he was aware of some favorable grant dates in some instances, he did not benefit from the grants and was "unaware of the accounting implications" of the actions.
However, that view was later disputed by Anderson. On April 24, the Securities and Exchange Commission charged Anderson and Heinen with the illegal backdating of stock options. At the same time, Anderson reached a settlement with the agency and agreed to disgorge the $3.5 million that he allegedly made through the backdating. See full story.
In a statement through his attorney, Anderson said he warned Jobs about the options, and said that certain grants would have to be re-priced, based on the dates they were actually granted by Apple's board of directors.
The SEC said it will not bring any "enforcement actions" on the company but has not said if Jobs as an individual is a direct target of any investigation into the backdating issue.
Shortly after the SEC charges were announced, Apple's board of directors issued a statement reaffirming its "complete confidence" in "Steve's integrity and his ability to lead Apple."
Analysts who follow Apple doubted that the SEC will end up pressing charges against Jobs or force him to quit as company CEO. Shaw Wu, of American Technology Research, said that it would be difficult to say Jobs is liable for any issues involved with the backdating matter because "the compensation committee at Apple is run by an independent board that is not comprised of Apple employees."
Wu holds a buy rating and a $145 price target on Apple's stock.
Gene Munster, of Piper Jaffray, recently called Anderson's accusations "a surprise," and estimated the matter having less than a 10% chance of involving Jobs. Watch Munster discuss the impact of Apple's options matter.
After Stock Has Been Issued, Where Are the Effects Seen?
Source: https://www.marketwatch.com/story/apple-shareholders-to-vote-on-stock-options-practices
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