In the old days, when agreements were concluded with a handshake, shared smoke, or some other ceremony, backdating was not an issue because the agreement, and evidence of the agreement, occurred simultaneously. These days, agreements are reached and then evidenced by a writing which usually takes some time to prepare, finalize and sign. It is not unusual for documents to refer back to a date that precedes the signing date. This may raise questions regarding the propriety of the date used in the document. It may also expose the parties and drafters to a variety of claims including, but not limited to, civil and criminal penalties and sanctions, as illustrated by the recent stock options backdating scandals.
Documents are often prepared and later signed to memorialize an agreement or event. Notes of shareholder, director or other meetings usually are taken as the meeting progresses. The notes are later formalized as minutes, which are then circulated to confirm accuracy, and finally for signatures. The date on the minutes is usually the date the meeting occurred, even though signing may occur weeks or even months later. With meetings, there is little chance of variation in dates used in resulting documentation. It may be more difficult to identify an appropriate date for a writing used to memorialize an agreement, since the precise moment when a “meeting of the minds” occurs may be subject to interpretation. In any event, there generally is nothing “wrong” with backdating to memorialize an actual event or agreement.
Backdating becomes “wrong” when a selected date results in a fabrication. The fabrication may be a writing that refers to an event or agreement that never actually occurred or, more often, a writing that refers to an actual event or agreement which is purported to have occurred at a date prior to the true date. Such fabrication generally occurs because an advantage may result to one or both of the parties. The advantage may be financial, legal or otherwise.
Use of an earlier date may reduce taxes payable in connection with a transaction by enabling a party to realize long term capital gain/loss treatment that might not otherwise apply or to satisfy another holding or timing condition, such as that related to identification of qualified replacement property in a like-kind exchange. A “legal” advantage may be sought where backdating is used to bring the date of a transaction into compliance with contractual, statutory or administrative requirements. An artificial date may be used to create the appearance that employee benefit plan conditions have been satisfied sooner rather than later or to create an appearance of compliance with federal or state securities law reporting requirements.
The consequences of backdating to fabricate may be quite serious, including exposure to substantial civil and criminal penalties, as in the recent stock options scandals. As a result, parties sometimes use an “effective” date, “as of” dating, or factual recitations within a document to highlight the break in time between the occurrence of an event or agreement and the subsequent signing of the document. However, even this strategy not be foolproof because it still involves selection of a date preceding the signing date, which may be unclear due to various interpretations that might apply to surrounding circumstances.
In many situations the difference between “acceptable” and “wrong” backdating is apparent. However, the seemingly clear line between memorialization and fabrication may become blurred. If you have any questions regarding backdating, please be sure to confer with legal counsel.