Summary
Aon plc (AON) filed an 8-K on August 15, 2007, reporting on the findings of an internal review regarding stock option grant date practices. The review, conducted by an external law firm and accounting firm at the request of the Audit Committee, found that Aon's procedures led to incorrect measurement dates for financial accounting and tax purposes for several thousand option grants between 1994 and 2006. Crucially, the Audit Committee found no evidence of misconduct by current or former management or directors. However, to address unintended benefits conferred by the accounting errors and to mitigate potential adverse tax consequences for employees under Section 409A of the Internal Revenue Code, Aon is implementing remedial actions.
Key Highlights
- 1Review found incorrect stock option measurement dates for thousands of grants between 1994-2006 due to procedural issues.
- 2No misconduct by current or former management or directors was found by the Audit Committee.
- 3A voluntary tender offer program will be implemented for U.S. employees (non-Section 16 officers) to correct option exercise prices and avoid Section 409A tax issues.
- 4The Company estimates a total cost of approximately $3.9 million for the tender offer program, including cash payments to eligible employees.
- 5Aon will indemnify eligible U.S. employees (non-Section 16 officers) for any Section 409A taxes, penalties, and interest incurred on options exercised in 2006 or 2007, estimated at $3.5 million.
- 6Two former senior executives, Patrick G. Ryan and Michael D. O’Halleran, had their 2002 stock option awards modified to adjust the exercise price to the correct accounting measurement date's fair market value.
- 7Patrick G. Ryan voluntarily offered to adjust his 2000 stock option award's price for similar reasons.
Frequently Asked Questions
The primary issue reported is the discovery of incorrect measurement dates used for financial accounting and tax purposes for a significant number of employee stock option grants made between 1994 and 2006 due to procedural errors. The company has confirmed no misconduct by management or directors.
Aon is implementing a voluntary tender offer program for U.S. employees (excluding Section 16 officers) to amend option exercise prices and provide cash compensation to offset the difference. Additionally, eligible employees will be indemnified for potential Section 409A taxes. Senior executives Patrick G. Ryan and Michael D. O’Halleran had their affected option awards adjusted.
Section 409A of the Internal Revenue Code deals with deferred compensation. The incorrect measurement dates for Aon's stock options created potential unintended benefits, which could trigger adverse tax consequences (including excise taxes and penalties) for employees under Section 409A, particularly on vested options after December 31, 2004.
Aon estimates the total cost for the remedial actions to be approximately $3.9 million for the tender offer program (cash payments) and an additional $3.5 million for indemnification of employees for Section 409A taxes on past exercises. The company also anticipates potential costs related to indemnifying Section 16 officers, estimated not to exceed $1.0 million (excluding penalties, interest, and gross-up).