Backdating and spring loading cancer dating
General e-mail messages may be sent using our "Contact Us" form, which can be found at Robert Profusek [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Day publications should not be construed as legal advice on any specific facts or circumstances.Key Observations About the Decisions Spring-Loading and Backdating May Breach Duty of Loyalty.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.If, for example, the compensation committee approves awards at a.m. This return was 20 times higher than the annualized returns for the company's stock during the same five-year period.
This puts a spotlight on compensation committees that determine executive compensation and their own compensation as directors.These cases are likely to cause companies to consider changing the process by which they grant equity-linked awards, including, possibly, modifying plan terms to specifically give directors more discretion or, possibly, less latitude in determining the strike price of option grants. The Tyson court stated that "[a] director who intentionally uses inside knowledge not available to stockholders in order to enrich employees while avoiding shareholder-imposed requirements" contained in stock incentive plans cannot "be said to be acting loyally and in good faith." But, according to the decision, it was the deception involved, not the "in the money" nature of the option, that is actionable and made the business judgment rule unavailable.For example, we may see plans amended to permit grants only during a company's "trading window." The Cases A summary of the key facts of the Tyson and Ryan cases and the courts' analyses follows. The Tyson court said that it was "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 at '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." Ultimately, Tyson may be reversed, but even if permitted to stand, its holdings will not necessarily result in the imposition of personal liability on the members of the Tyson compensation committee if litigated to conclusion.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.Lawyer Contacts For further information, please contact your principal Firm representative or one of the lawyers listed below.
In the last year, numerous cases of backdating stock options have come to light.