November 27, 2007

Officer Exposure for Stock Option Backdating

Travis Laster notes: On November 21st, Chancellor Chandler of the Delaware Court of Chancery issued a further decision in Ryan v. Gifford, the stock option back-dating litigation involving Maxim Integrated Products, Inc. This ruling addressed whether certain officer defendants could be subject to jurisdiction in the Court of Chancery, but has broader implications for potential officer exposure.

Under 10 Del. C. sec. 3114, officers and directors of Delaware corporations implicitly consent to the jurisdiction of the Delaware courts for actions relating to their duties. Section 3114(b), the implied consent statute for officers, became effective on January 1, 2004. Certain officer defendants in Ryan argued that they could not be subject to jurisdiction in Delaware because they did not take any action in their official capacities after this date. The Chancellor agreed. He specifically held that the following acts are NOT sufficient to establish Delaware jurisdiction: (i) holding allegedly back-dated options, (ii) allowing allegedly back-dated options to vest, and (iii) exercising allegedly back-dated options.

The Chancellor went on to hold, however, that officers who were alleged to have participated in some way in the purported scheme after January 1, 2004 could be subject to Delaware jurisdiction. He based this ruling on his holding that steps allegedly taken to conceal stock option backdating constitute a breach of fiduciary duty sufficient to give rise to Section 3114(b) jurisdiction. In Ryan, it was enough that the plaintiffs had alleged facts suggesting that the officer (i) the officer knew of the back-dating and (ii) he kept silent and concealed his knowledge of the backdating in order to escape detection. The officer’s alleged breach post-2004 breach was thus not his role in the granting of the options, but rather his subsequent participation in the alleged concealment.

Although the Chancellor’s jurisdictional ruling will have importance for officers sued in Delaware, the more important and wide-ranging aspect of the holding is the additional clarification on how a claim can be stated against an officer for involvement in stock option backdating. Practitioners investigating stock-option backdating or who are involved in stock option backdating litigation should take particular note of this ruling.

We have posted a copy of the opinion in the “Backdated Options” Practice Area on

Options Backdating and Loss Causation

Last week, Kevin LaCroix weighed in on his D&O Diary Blog on the recent dismissal of the backdating lawsuit filed against Apple. As Kevin notes, “Judge Fogel’s opinion is seemingly important, particularly his comments with respect to loss causation, given that many of the options backdating cases have been filed in his judicial district – and indeed many backdating cases are pending before Judge Fogel himself. However, in issuing his opinion, Judge Fogel has repeated his unfortunate practice of issuing his opinions as ‘Not for Citation.'”

Note last week’s WSJ article about the growing numbers of backdating lawsuits being settled or dismissed…

Options Backdating: Mercury Interactive Settlement

As noted above, private litigants are making headway with settling backdating cases. In this podcast, Chris Keller of Labaton Sucharow discusses options backdating lawsuits and the recent settlement of the Mercury Interactive options backdating litigation, including:

– What is options backdating securities fraud (not just derivative) and how do you distinguish these cases?
– What are the terms of the Mercury Interactive settlement?
– Why did Mercury settle for a large sum ($117.5 million) when most have been talking down the significance of such cases?
– How is this settlement significant for those companies out there still facing backdating lawsuits?

– Broc Romanek