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.
Depending on the particular facts at hand, the decisions indicate that a director may be deemed to have breached his or her duty of loyalty by acting deceptively and in bad faith (and therefore outside the protections of the business judgment rule and personal liability limitations in the charters of most public companies) by authorizing the granting of options priced at a time when the director knows those options will be quickly worth more upon the subsequent release of material, nonpublic information.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?A recent ruling in the Delaware courts indicated that companies and their board directors would be liable if options were wrongly issued.Furthermore, the IRS has decided that employees who cashed in on backdated options may have increased tax liabilities and face significant financial penalties. The Judge in the Delaware decision, Chancellor William B.
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To quote one of the decisions, intentional backdating is 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.' " Disclosures Critical. 6, 2007), 2007 WL 416132, involved allegations that members of Tyson Foods' compensation committee violated their fiduciary duties by approving spring-loaded options from 1999 to 2003.