Did you make the mistake of buying a highflying stock last spring, one whose price collapsed by the end of the year? Wouldn't you like to cancel the purchase, to get your money back and forget the whole thing?
You can't cancel the trade, of course. But there is a fair chance that the chief executive or other top officer of that company was allowed to cancel his or her own purchases of company stock. The "rescission" of exercised stock options is the latest fad in corporate executive suites.
The accountants are now debating how to account for the transaction, and whether companies that make such gifts to their executives ought to suffer an earnings reduction as a consequence. But so far there has been little attention given to the most important question: Will the companies be forced to tell their owners — the shareholders — whether this new benefit was given to senior managers?
Accountants from major firms say privately that they are auditing numerous companies that allowed executives in December to rescind their exercise of stock options earlier in the year. So far, no names of companies that did it have become public.
Let's take a made-up company, one we'll call Internet Mania. Back in March, when Mania's share price was $100, an executive exercised stock options to buy 10,000 shares of the company's stock for $10 each, or a cost of $100,000.
Come December, the stock had fallen to $5 a share, and the executive faced a tax bill greater than the value of the stock he now owned. So the company obligingly allowed him to cancel the purchase.
There is a reason this came into being last year. It is technology companies that have been the most liberal with stock options, and 2000 was the year that many such stocks crumbled. From March 10 through the end of the year, the Nasdaq computer index fell 56 percent, but the median stock in the index was down 79 percent. There were a lot of rueful stock purchasers.
It is not clear whether some executives who canceled their purchases had sold the stock as soon as they exercised the options. The sale of the stock would not, of course, be rescinded. But that would be fine with the executive, since he received a high price. He would have to come up with other shares to turn into the company.
Under current rules, companies can often issue stock options without even getting permission from their shareholders. The Securities and Exchange Commission has been pushing to change that, but has run into resistance from Nasdaq, where many companies see no need to involve the shareholders in such decisions.
The emergence of rescinded stock options shows that new rules are needed to bar such rescissions unless shareholders vote to allow them.
Companies that allow rescissions have to return the money paid to buy the shares and lose tax benefits they would otherwise get. "There are cash-flow consequences, and shareholders should be aware of them," said Jane Adams, an accounting analyst at Credit Suisse First Boston.
Many companies may be able to avoid disclosing what happened, simply because the amounts will be relatively small. But the fact that companies did this is important to shareholders, even if not much money is involved, and the S.E.C. should require disclosures — including the names of executives who benefited — in corporate proxies.
Let the companies explain why it was necessary to assure that a falling stock price did not hurt the bosses.
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