Desimone v. Barrows

June 14, 2007

Publication| Corporate Transactions

In Desimone v. Barrows, C.A. No. 2210-VCS (Del. Ch. June 7, 2007), the Court granted defendants’ motion to dismiss a stockholder derivative complaint alleging stock option backdating, springloading and other manipulation, finding that plaintiff lacked standing to challenge option grants made prior to the time at which he acquired his shares and that plaintiff failed to satisfy his burden of pleading demand futility. The Court carefully distinguished the claims before it with those presented in Ryan v. Gifford , C.A. No. 2213-N (Del. Ch. Feb. 6, 2007) and In re Tyson Foods, Inc. Consolidated Shareholder Litigation , C.A. No. 1106-N (Del. Ch. Feb. 6, 2007), and further clarified the pleading standard required in derivative actions alleging stock option manipulation.

Of particular significance, the Court found that because plaintiff failed to demonstrate that the directors were aware that certain option grants to employees were backdated, there was no basis to conclude that the board faced a substantial threat of liability from claims regarding those grants. As a result, plaintiff could not show there was a reasonable doubt as to the board’s ability to consider those claims.

The Court also found that plaintiff failed to state a claim with respect to the alleged manipulation of certain options awarded to the directors, where the challenged options were granted to the directors in fixed amounts and on pre-established dates under a stockholder-approved, non-discretionary plan. The Court stated that the very point of such a plan is "to ensure integrity by making the directors suffer the ugly and enjoy the good that comes with a consistent, non-discretionary approach."

The Court also noted that, where a stockholder-approved plan permits options to be priced below market, it would be within the realm of business judgment to issue options at a low point in a trading period (although the directors could not in that situation falsely represent that the options were priced at fair market value, nor could they knowingly account for the options in a manner that would result in tax, regulatory or other violations).

Desimone provides significant guidance to corporations involved in stock option backdating investigations and litigation as well as corporations reviewing and considering enhancements to their equity award practices and policies.

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