Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Yesterday, we posted an Advance Copy of our January-February 2008 Issue of The Corporate Executive because we know that so many of you are grappling with drafting your CD&A disclosures now. Drafting model disclosures is no easy task – and everyone obviously has to customize for their own circumstances – but David Lynn and Jesse Brill worked hard to put together these examples of “best practice” CD&A disclosures to help you get a head start on what the SEC Staff will be looking for in your CD&As next year.
We will be mailing the issue to ’08 subscribers early in January, perhaps with a few tweaks to the advance copy – so please send any thoughts you might have on what we drafted to Dave or myself. Here is where you can access this Advance Copy now (you will need to renew for ’08 to receive it).
Note that Dave will be writing the lead piece in each issue of The Corporate Executive this coming year. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial, which will give you immediate access to this important issue.
Posted: SEC’s Adopting Releases for Shareholder Access and Rule 144
With many of the executive compensation comment letters likely to be posted by Corp Fin on Edgar sometime in the next month or so, it’s a good time to test your knowledge about the SEC comment letter process. Thanks to David Mittelman of Reed Smith – who served as a Corp Fin Branch Chief until last year – we have posted our 3rd quiz in a series: “Pro or Troll #3: SEC Comment Letter Process.”
In this podcast, Maria Pizzoli, Assistant General Counsel of Sun Microsystems, discusses how e-proxy went for Sun the first time around, including:
– Why did Sun decide to adopt the Notice and Access model?
– What were the company’s major concerns about adopting the Notice and Access model?
– Did Sun adopt the model with respect to 100% of your stockholders or did it follow a hybrid approach?
– Were there any follow-up mailings?
– Did you send out a press release or add language to your website to explain the Notice and Access model?
– How many requests for printed materials did the company receive and was this in keeping with your expectations?
– What was the quorum attained at Sun’s meeting? How did it compare with prior years?
– How did you handle the web site posting of your proxy materials?
– How did the company’s investors react to your adoption of the Notice and Access model? Did you receive complaints?
– What were the biggest surprises you encountered with adopting the Notice and Access model?
Kicking the Tires: The Year-End Governance Check
In this podcast, Kris Veaco of the Veaco Group runs down some governance action items to consider for year-end, including:
– What were your responsibilities at McKesson?
– What does the Veaco Group do?
– What is an example of what you can do for a company?
– What are some year-end corporate governance tips that our listeners should consider?
The FASB/IASB Convergence Begins: New FAS Nos. 141(R) and 160
As I blogged yesterday on DealLawyers.com, the FASB issued FAS No. 141(R), Business Combinations (as well as FAS No. 160 regarding noncontrolling interests in consolidated financials). Here is an excerpt from the FASB’s press release:
“The new standards represent the completion of the FASB’s first major joint project with the International Accounting Standards Board (IASB), as well as a significant convergence milestone,” states FASB member G. Michael Crooch. “These standards and the counterpart standards issued by the IASB will improve reporting while eliminating a source of some of the most significant and pervasive differences between International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP).” The IASB plans to issue its counterpart standards IFRS 3 (revised), Business Combinations, and IAS 27 (as revised in 2007), Consolidated and Separate Financial Statements, early next year.
Statement 141(R) improves reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable, and relevant information for investors and other users of financial statements. To achieve this goal, the new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.
Statement 141(R) also will reduce the complexity of existing GAAP. The newly issued standard includes both core principles and pertinent application guidance, eliminating the need for numerous EITF issues and other interpretative guidance.”
Yesterday, the SEC sued Maxim Integrated Products (and its CEO and CFO) for filing false financial information by improperly backdating options. The CEO agreed to pay $800k; the company didn’t pay a fine. Meanwhile, a second Brocade backdating case went to jury. And there’s more to report…
The following analysis is from Travis Laster: Now, there is a third important decision from Chancellor Chandler in the Maxim option backdating case: Ryan v. Gifford, C.A. No. 2213 (Nov. 30, 2007). It comes in the guise of a discovery decision, but it has major implications for special committee practice. [We have posted this opinion, as well as the other ones from this case, in our “Backdated Options” Practice Area on CompensationStandards.com.]
1. Holding: Waiver of Privilege – In the most significant of several holdings, the Chancellor ruled that a Special Committee created by the Maxim board to investigate concerns about stock option backdating waived the attorney client privilege as to all of the communications between the Special Committee and its lawyers and therefore had to produce all communications relating to the investigation and report. The waiver arose because the Special Committee and its counsel made a presentation to the full board regarding the outcome of the investigation at which the individual board members who were alleged to have been involved in the option scheme and their counsel were present.
According to the Chancellor, “The presentation of the report constitutes a waiver of privilege because the client, the Special Committee, disclosed its communications concerning the investigation and final report to third parties – the individual director defendants and [their counsel] Quinn Emmanuel – whose interests are not common with the client, precluding application of the common interest exception to protect the disclosed communications. …The Special Committee was formed to investigate wrongdoing and in response to litigation in which certain directors were named as individual defendants. This describes a relationship more akin to one adversarial in nature.” (page 7). The Court found that the waiver as to the presentation of the report was a “partial waiver” which “operates as a complete waiver for all communications regarding this subject matter.” (pages 6-7).
The Chancellor also held that in the absence of a waiver, the materials would be ordered produced under the “good cause” exception to the attorney client privilege – also known as the Garner doctrine – which can be invoked in stockholder litigation against fiduciaries.
As a result, the Chancellor ordered Maxim to produce “all communications between [Special Committee counsel] and the Special Committee and [Special Committee counsel] and Maxim.” This included all of the communications that occurred “during the course of the investigation” and during the board presentations.
The Special Committee asserted work product doctrine as to notes of witness interviews, arguing that they necessarily contained attorney mental impressions. The Chancellor ordered these documents provided to the Court for in camera inspection.
Although the application of Garner to these facts is consistent with Delaware precedent, the waiver rationale appears novel. There is considerable tension between the ruling and typical special committee practice, in which committees frequently render a final report and make a presentation to the full board. Historically such a report and presentation have not resulted in a complete privilege waiver. Instead, there has been case-by-case analysis under Zapata as to what materials a plaintiff can obtain, with special committees largely being able to maintain the attorney-client privilege. In footnote 2, the Chancellor notes that the Maxim committee was not a special litigation committee and implies that the privilege analysis might have been different for a formal SLC, citing Moore Business Forms v. Cordant Holdings Corp.
Moore Business Forms, however, contemplated a special committee that would negotiate with and oversee litigation against a major stockholder; it did not involve a traditional special litigation committee. It is thus not clear that a meaningful distinction with respect to the privilege can be drawn between formal special litigation committees and other board committees, or that Ryan‘s holding can readily be cabined from extending to other committee contexts.
2. Risk of No Privilege Going Forward – In the aftermath of Ryan, there is a significant risk that the attorney-client privilege will not be available for a special committee and its counsel when conducting an internal investigation, particularly in the area of stock option backdating, if the special committee chooses to give a report and presentation to the full board with named defendants in attendance. Excluding named defendants and their counsel from the presentation of the report would provide a basis to distinguish Ryan and avoid waiver, but such a course may not be practical. Future committees and their counsel may also attempt to document clearly that they are not intending to waive any privilege and to distinguish between the Committee’s substantive report and mid-investigation communications.
There is support in Delaware law, primarily in the takeover context, for permitting discovery into what a board was told by counsel but barring discovery into underlying lawyer communications. Given the broad waiver rationale in Ryan, it is not clear how such an approach would fare. It does seem likely, however, that future decisions will cabin the expansive scope of the waiver ruling.
3. Producing in Native File Format – In a second noteworthy holding, the Chancellor ordered Maxim to produce documents in native file format, with original metadata. This is the first Delaware Chancery opinion to address native format and metadata issues. The Chancellor held that “metadata may be especially relevant in a case such as this where the integrity of dates entered facially on documents authorizing the award of stock options is at the heart of the dispute.” (page 3). The Chancellor also noted that the Special Committee and its advisors had analyzed the metadata as part of their investigation. The opinion also addresses a handful of other issues, mainly involving discovery and claims by the company that production of certain documents would be burdensome.
In addition, I recently posted the latest annual update of Alan Kailer’s chapter regarding preparation of the executive compensation tables. And don’t forget our popular contest which has a host of 10-K tips: “The Main Event: Vote for Your Favorite Practice.”
Couple of SEC Doings
Next Tuesday, the SEC will hold an open Commission meeting to adopt its Form D and S-3 proposals, as well as approve the PCAOB’s budget and issue an oil & gas concept release.
Then, next Tursday and the following Monday, the SEC will hold IFRS roundtables. The SEC also has posted the adopting release regarding the ’34 Act registration exemption for employee options.
The Latest on Fairness Opinions
With new rules from FINRA impacting fairness opinion practices (and a host of new cases addressing management conflicts), the dynamics – and processes – of preparing fairness opinions have been changing. Join these experts tomorrow on DealLawyers.com as they explore the latest trends and developments in this webcast: “The Latest on Fairness Opinions” (print out these “Course Materials” in advance):
– Kevin Miller, Partner, Alston & Bird LLP
– Dan Schleifman, Managing Director and Chairman of the Investment Banking Committee – Advisory, Credit Suisse Securities (USA) LLC
– Ben Buettell, Managing Director and Co-Head Fairness Opinion Practice, Houlihan Lokey Howard & Zukin
– Denise Cerasani, Partner, Dewey & LeBoeuf LLP
This program will cover:
– Recently approved FINRA Rule 2290 – what impact will it have on fairness opinion practices?
– Fairness Opinions: Their Uses and Abuses – How should (and do) boards use fairness opinions?
– What are the implications of recent case law developments regarding investment banking conflicts, including the disclosure of fees (Caremark) and discovery regarding material relationships (Orstman)
– What are the latest issues raised by SEC Staff comments regarding fairness opinion disclosure
A while back, I began warning folks that they need to update their time & responsibility this year for e-proxy; we have now posted a newly updated “Sample Time & Responsibility Schedule” (which is posted in our “Annual Stockholders’ Meeting” Practice Area). In this podcast, John Newell of Goodwin Procter discusses how to update your Time & Responsibility Schedule, including:
– What changes should companies make to their timetable?
– What areas should companies be particularly mindful of this year? In other words, what are the areas where companies often find that they miss a deadline?
Yesterday, the Treasury and IRS jointly issued this notice allowing 409A corrections. I know this transitional guidance is something that many had been waiting on…
Key Executive Compensation Takeaways from Our Conferences
The Nov-Dec 2007 issue of The Corporate Executive – which has just been sent to the printer – includes important analysis and guidance regarding fixes companies will need to make to their compensation practices and disclosures next year – and much more. We have posted this blurred issue so that non-subscribers can get a sense of it before trying a 2008 no-risk trial, under which you can get this issue and the rest of 2007 for free. The issue includes pieces on:
– Key Executive Compensation Takeaways from Our Conferences
– Google’s Transferable Stock Options—Follow-Up
– ESOARS—Staff Reaffirms Use to Value Options Under 123(R) (But, Other Accounting Uncertainties)
– The New Requirement to File a Section 6039 Return with the IRS—For 2007?
– Does Anyone Really Care About the FAS 123(R) Earnings Charge? Deep Thoughts II (and Some Shallow Ones, Too)
– The New Rule 144 Amendments—Our Upcoming Video Conference
A number of members e-mailed me after my recent blog about D&O questionnaires to point out a few items that I had missed (eg. Nasdaq’s independence threshold has risen). In this podcast, Craig Mordock of Morrison & Foerster discusses areas where D&O questionnaires may need to be updated for this proxy season, including:
– What changes do you recommend that companies make to their D&O questionnaires for the ’08 proxy season?
– What areas of D&O questionnaires often need tweaking each year?
– What processes of reviewing D&O questionnaires before they are sent to D&Os might need a change?
– How about the process of reviewing the responses received from D&Os?
2nd Round: Corp Fin Compensation Disclosure Comments
I’m hearing from some members that the second round of comments emanating out of Corp Fin’s executive compensation disclosure review project are starting to trickle out. Quite a few of the 350 companies that were initially sent comment letters are likely to receive notification from the Staff that their review is complete and that there are no further comments.
For these companies, the 45 calendar day (or more if the Staff decides to take longer) countdown begins until the Staff makes the company’s responses (as well as the comments they received) public. You may recall the Staff confirmed this 45 day or greater timeline in the Staff’s Report on compensation disclosures.
Rightsizing Compliance Programs for Smaller Companies
Tune in for tomorrow’s webcast – “Rightsizing Compliance Programs for Smaller Companies” – to learn how to master the challenges (ie. resource, culture and other) of developing and implementing compliance programs for small companies. The program also will review emerging best practices and recent legal developments relating to compliance programs for businesses of all size. Please print these Course Materials in advance.
We have received so many requests from members for practical implementation guidance for the new Rule 144 rules that we are holding a Video Webconference on January 15th: “New Rule 144: Everything You Need to Know – And Do NOW.” Here is a Conference Agenda and FAQs.
This Conference will lead off with the SEC Staffers who wrote the rules. Then, the Rule 144 experts – Jesse Brill, Alan Dye and Bob Barron – will provide the essential implementation guidance that you will need to protect yourself and your executives. With well over a century of Rule 144 experience among them, each of them continues to advise issuers, transfer agents and the major banks on Rule 144 issues on a daily basis – just as they have done since Rule 144 was adopted.
The Key Conference Materials alone – which will provide the specific procedures, new memos, legends, representation letters, etc. that you will need to protect yourself – make this Conference invaluable. Act now to take advantage of reduced rates for those of you that use the TheCorporateCounsel.net and The Corporate Counsel by registering online or via this order form.
Hot Topic: CEO Succession Planning
Earlier this week, the WSJ ran a column noting how relatively few boards (still) don’t engage in the important practice of CEO succession planning. I say “few” even though the ratio is about 50%, because all boards should regularly engage in succession planning. In this podcast, Ron Garonzik of the Hay Group provides some insight into the CEO succession process and issues related to it, including:
– How should boards plan for orderly succession planning?
– What factors should a board consider when weighing internal vs. external succession candidates?
– How about emergency succession planning?
– Are there any developments recently changing how boards plan?
– Should boards have any written policies regarding planning – or is it more of an informal process?
Full Circle: Pfizer Adopts a Majority Voting Bylaw
Over two years ago, Pfizer kicked off the “majority vote movement” when it became the first company to adopt a director resignation policy. Last month, Pfizer joined the many companies that have taken a step further and adopted a majority voting bylaw (that requires director nominees to receive a majority of votes cast to be elected in an uncontested election). A plurality vote threshold would continue to apply in contested elections.
Many investors – including the Carpenters Union – argue that director resignation policies alone are not sufficient since it’s unknown whether these policies could be enforced against a recalcitrant director. According to this report, nearly half of the S&P 500 now have a majority vote standard, with about another quarter having director resignation policies.
Perhaps exhausted by the ongoing controversy surrounding the dual shareholder access proposals – 34,000 comment letters! – yesterday’s open Commission meeting failed to produce the type of confrontation that were widely expected. Many felt this Commission meeting could rival a WWF match. But alas, after each Commissioner read their statement, few questions were even asked of the Staff. Here is the SEC’s press release, a Corp Fin Staff statement and the Chairman’s statement.
The vote was 3-1 – with short-termer Commissioner Nazareth dissenting – for the Staff to overturn the AFSCME decision and adopt rules to reiterate the Staff’s long-standing view that companies may exclude access proposals under Rule 14a-8(i)(8). As he had stated before this vote, Chairman Cox noted he would have preferred to do more and promised to revisit this topic next year – but said the SEC needed to clarify the ground rules ahead of this proxy season.
Following up on some thoughts expressed in comment letters, Commissioner Nazareth expressed concerns that this rulemaking might affect the SEC’s other 14a-8 interpretations, such as on majority voting and declassifying boards, but the Staff said they felt comfortable that this would not happen.
The real fireworks began right after the meeting, when all sorts of investor groups, members of Congress, etc. issued statements disapproving the SEC’s rulemaking (eg. CalPERS; CII; RiskMetrics; AFL-CIO; Rep. Frank; Sen. Dodd) – and some approved (eg. Marty Lipton). It’s notable that the opposition is fairly organized on this issue; I can’t imagine something like this happening even five years ago.
In addition, AFSCME submitted proposals to amend the bylaws of Bear Stearns and JP Morgan Chase to create proxy-access procedures (North Carolina’s Treasurer joined in co-filing both proposals and New Jersey’s Division of Investments joined in the Bear Stearns one). And I think we will be seeing more of these proposals submitted to companies soon enough – so expect this issue back in court fairly soon…
[Speaking of fireworks, check out this 1-minute video of the last classic hotel in Vegas being imploded a few weeks ago. The Rat Pack used to do their thing at the Frontier.]
SEC Adopts Rules to Facilitate Shareholder E-Forums: My Ten Cents (Sorta)
As noted in this press release and Corp Fin Staff statement, the SEC also voted to amend the proxy rules to facilitate the use of electronic shareholder forums. The rules enable participation in an electronic shareholder forum, which could potentially constitute a solicitation subject to the current proxy rules, to be exempt from most of the proxy rules if the exemption conditions are satisfied. Here is a statement from Chairman Cox.
What does this mean? The demise of the traditional annual meeting? No more shareholder proposals (the rule itself doesn’t prohibit proposals, but maybe shareholders will find better avenues for their concerns and wishes)? Or will nothing happen? With Web 2.0 in its infancy, I think it’s too soon to tell what the future holds.
Borrowing very liberally from Gary Lutin (who has done a related podcast described below), here is a 10,000 feet level perspective on how e-forums might work effectively:
– The nature of a forum process depends on the issue or agenda that’s defined, and on who’s attracted to participate. If a genuinely open forum is established to address value issues, I think it will attract a fairly broad range of “mainstream” investors interested in how management will make the company successful.
– Rather than a narrow constituency that’s attracted to protest rallies,
corporate managers can – and should – make effective use of the “forum” processes themselves to define issues, rather than simply respond once someone else has defined an issue.
– A genuinely open forum can actually be a very effective means for management to understand and respond to investor concerns, assuming one defines the agenda properly and keeps it on track.
The Future? Independent Shareholder Forums
Quite an interesting person with some great ideas – and who has executed some of these ideas! (that’s the hard part) – Gary Lutin, CEO of Lutin & Company and Founder of ShareholderForum.com, shares some insight into how an independent shareholder forum works in this podcast, which includes discussion on:
– What is ShareholderForum.com?
– How do the shareholder forums work?
– Can you describe what happened recently with the forum devoted to Verizon?
– What should be the goals of independent shareholder forums?
Yesterday, Tom Kim was named Corp Fin’s new Chief Counsel, filling the slot that Dave Lynn lit up until six months ago when he joined our team. Tom has rather large shoes to fill.
Tom has been serving in Chairman Cox’s office and as Counselor to the General Counsel, focusing on Corp Fin issues. Before that, he worked under former Deputy Director Mike McAlevey at General Electric and for former Director John Huber at Latham & Watkins – so he’s had plenty of exposure to the Division. Tom’s new position also includes a title of “Associate Director,” a new title (and more money) for the Chief Counsel position.
A Tale of Two Voluntary E-Proxy’ers
Over the past month, I have found only a few new companies trying voluntary e-proxy (eg. Fannie Mae; see full list in our “E-Proxy” Practice Area) – so maybe the initial reports of low retail shareholder turnout is driving companies to “wait and see.” For the companies doing e-proxy, I am still disappointed about how they fail to clearly inform shareholders about what they’re doing on their IR web pages – and more importantly for them, fail to make it easy for shareholders to vote.
One of these new e-proxy’ers – Pike Electric – has put together a 6-minute video annual report. As noted in this press release, the purpose of providing the video is “provide viewers with highlights of Pike Electric’s key accomplishments in fiscal 2007, and includes an overview of Pike Electric and its strategic initiatives. The short documentary also provides stockholders and other interested parties the opportunity to see and hear directly from Pike Electric’s management team.”
The idea of an annual report video is pretty interesting on its face, but more important in my mind is that the Pike Electric IR web page contains a prominent link to Broadridge’s page where shareholders can vote. This is something that I urge every company to do, even if they are not doing e-proxy!
In the “CEO’s Letter to Shareholders,” Pike Electric informs shareholders that they are doing e-proxy – and explains briefly how the company is using a video this year rather than a 10-K wrap. Two points – one substantive and one not:
1. I guess I’m a little confused why the video is called an “annual report.” I understand the theory that it’s part of a 10-K wrap, but looking at the video’s contents, my guess is that the company will be relying on the 10-K itself to satisfy Rule 14a-3(d) – so it doesn’t really matter what the video’s content is except from a 14a-9 perspective. However, by calling it a “video annual report,” it might imply that the video standing along somehow meets the 14a-3 requirements, which I don’t think it does. Anyone else have thoughts on this?
2. In my opinion, it would be better if the CEO’s letter was in HTML rather than a PDF. In this alert, Jakob Nielsen – the godfather of online usability – does a fantastic job of explaining why the PDF format not good for online reading.
In comparison, another new e-proxy’er – Itex – also has a bunch of videos with the CEO describing its business – but this company doesn’t label any of them as an annual report. I really don’t view Pike Electric’s video as being different than what Itex has done (although some of the statements in Itex’s latest video scare me – check out the CEO’s statements about “how buying Itex’s stock is no different than buying Microsoft and Intel, just call your broker”).
I like the idea of companies using video to illustrate what they are doing, but I hope that the legal department screens these before posting. To play it safe, I would ensure the CEO refrains from ever mentioning the term “stock” in a video.
Regarding e-proxy, Itex’s “Annual Meeting” page has a link to enroll in e-delivery – but it doesn’t mention that Itex is doing e-proxy nor does it provide a link to allow shareholders to vote. It’s also notable that Itex didn’t bother to update their “Investor FAQs” to indicate they are doing e-proxy; rather the FAQs note that shareholders can request e-delivery if they want. Although companies that do e-proxy may also want to collect consents, I worry that shareholders may find this FAQ confusing if there is no mention of e-proxy in any of the FAQs.
I randomly selected these two companies for this blog; I easily could have selected almost any other company trying e-proxy so far because I haven’t seen many that do a solid job of clearly communicating to shareholders what they are doing – and making it easy for them to vote…
Another Potential E-Proxy Implementation Issue?
Believe it or not, Keith Bishop recently came upon another potential e-proxy implementation issue. If a company has issued stock options in California at a time when it was not listed on the NYSE or the Nasdaq Global Market (fka National Market), it’s likely that the company’s option plan requires delivery of financial statements to security holders.
The reason is that California’s exemption for option plans required plans to provide for shareholders to receive financial statements (except when the issuance was limited to key employees with access to equivalent information; see 10 CCR Sec. 260.140.46). This same requirement applied if the company qualified the plan.
Although the requirement was amended this year to be inapplicable to Rule 701 compliant plans, Keith suspects that many companies still have plans requiring delivery of financial statements to shareholders. This could present a problem if they intend to use the new notice and access alternative. Therefore, Keith recommends that companies check their option plans if they intend to use e-proxy.
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.
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…
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?
Three years ago, we posted an online survey regarding how companies are dealing with compensation committees and compensation consultants (here are those old results; I believe that survey’s low response rate was because the survey was ahead of its time). A lot has changed dramatically in this area since then – so we have posted a new survey on the same topic. Go ahead and participate now!
