February 7, 2007

Stock Options: Chancellor Chandler Delivers Backdating and Springloading Decisions

Yesterday, Delaware Chancellor Chandler delivered two opinions in declining to dismiss complaints alleging backdating of options (in Ryan v. Gifford) and spring-loading of option grants (in Tyson Foods). We have posted copies of these opinions in our “Backdated Options/Grant Policies” Practice Area.

Here is some analysis of these opinions courtesy of Potter Anderson & Corroon:

The backdating case is Ryan v. Gifford. The Chancellor declined to stay the case in favor of earlier filed California federal actions, citing, among other things, the interest of Delaware courts in deciding novel and important issues of Delaware law. Not surprisingly, the Chancellor refused to dismiss the complaint, saying very strongly that intentional backdating constituted bad faith and that the board made fraudulent disclosures to shareholders by putting out proxy statements and other documents saying that the grants complied with the plan when in fact they did not, because the plan required the options to be priced at fair market value on the date of grant. The Chancellor did dismiss the complaint as it related to backdating that allegedly occurred before the plaintiff acquired his stock in a stock-for-stock merger.

The Tyson Foods opinion deals with a complaint challenging many aspects of compensation and alleged self-dealing. Among the allegations were several instances of “spring-loading”; that is, issuing options ahead of news the directors allegedly knew would move the stock higher. In refusing to dismiss the spring-loading complaint against the members of the compensation committee that granted the options, the Chancellor found it “difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at ‘market rate’ and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more.”

The Chancellor went on to clarify that it was important to his decision that the plan in question was approved by shareholders and that to survive a motion to dismiss the plaintiff must plead that the directors knew they had inside information and intended to “circumvent otherwise valid shareholder-approved restrictions upon the exercise price of the options.”

Lawsuits Against Audit Firms

Against the backdrop of the push for capping auditor liability, here is an interesting paper on large claims filed against the auditing firms. As the paper notes, the incidences of such claims has declined – and these claims may be dismissed, dropped or settled for substantially less than the amounts claimed. The paper also discusses trends in the litigation. The paper is posted in our “Securities Litigation” Practice Area – which has grown so large that it’s almost a website unto itself – under “Studies Re: Securities Litigation Trends.”

Forecast for 2007 Proxy Season and Strategies to Consider

We have posted a transcript of the popular webcast: “Forecast for 2007 Proxy Season and Strategies to Consider.”