Backdating and spring loading
Is it good policy, or consistent with decades of Delaware jurisprudence, for plan terms to be interpreted in such a manner as to foreclose the exercise of director judgment in this regard? As in Tyson, the Ryan court excused the plaintiff from making demand, in part, because, in the court's view, backdating options qualifies as one of those " 'rare cases [in which] a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists.' " The plaintiff's allegations were, according to the Ryan court, sufficient to raise a reason to doubt the disinterestedness of Maxim's board and to suggest that they were incapable of impartially considering demand.Moreover, the Tyson complaint alleges that the compensation committee "knew" that the value of Tyson stock would go up, but this will likely be difficult to prove at trial. Ryan v. The Ryan court stated that intentional violation of a stockholder-approved option plan, coupled with inaccurate disclosures in proxy statements regarding the directors' purported compliance with that plan, constitutes conduct that is disloyal to the corporation and in bad faith.Board Directors better get ahead of this wave or risk lawsuits and personal liability.OTHER ARTICLES BY Keith Kefgen, New York CFO Compensation in the Gaming Industry Can We Have Compassionate Leaders In A Dog-Eat-Dog World?In his decision, Chancellor Chandler stated, “It is 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 a “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”.This puts a spotlight on compensation committees that determine executive compensation and their own compensation as directors.
Unfortunately, it circumvents the law and the original intent of the option.Spring loading options is the practice of granting options just prior to issuing good news (financial performance, merger/acquisition, positive news regarding a regulatory approval and so forth).If spring loading is deemed to be illegal, it could cause an even worse situation, as spring loading has been common practice in corporate America.Prior federal securities law cases have held that the award of equity-linked rights to management cannot be challenged when the compensation committee is apprised of material, nonpublic information. 6, 2007), 2007 WL 416162, involved allegations that options granted to management of Maxim Integrated Products by that company's compensation committee were backdated.To us, recognizing that the terms of a particular plan may dictate a result, a determination of "fair market value" is not formulistic or susceptible of exact definition. The 20-day return on options granted to management averaged 243 percent (annualized) over a five-year period.
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In this regard, the Ryan court observed that a board has "no discretion to contravene the terms of stock-option plans." Procedural Note Both opinions addressed defendants' motions to dismiss the complaints, and in Ryan, the court was careful to note that: Nonetheless, given the practical dynamics of derivative litigation, the Chancery Court's analysis in Tyson and Ryan is likely to give the plaintiffs' bar more leverage in the early stages of litigation that alleges the granting of backdated and spring-loaded options and make it more likely that such suits will survive a motion to dismiss.