We will be examining some of the recent cases in the Delaware Court of Chancery that involved allegations of improper option granting practices by boards of directors. The three major decisions thus far have been Ryan v. Gifford, In re Tyson Foods, and Desimone v. Barrows.  In order to better understand the issues involved in challenges to options grants, it is helpful to first define some of new jargon being used. An excellent breakdown of the three scenarios that have thus far received judicial scrutiny is provided by Chancellor Strine in Desimone v. Barrows, No. 2210-VCS, 2007 WL 1670255, at *6 (Del. Ch. June 7, 2007).

The most commonly known practice, and the one receiving nearly all of the recent media attention, is backdating. Backdating occurs when a company issues options to an employee or director on a particular date and falsely records the grant date as being at an earlier time when the company’s stock price was lower. While the company attempts to give the appearance that the options were granted at the current market price, they are in fact issued “in the money” through the false recording of the grant date. Id.

Another options granting practice has been dubbed spring loading. This occurs when a company is in possession of positive, material, non-public information that will most likely lead to an increase in the stock price once it is disclosed. Id. Before disclosing the information, the company will grant options to an employee or director.

Bullet dodging is essentially the opposite of spring loading.  In those circumstances, issuance of the options are delayed until after the disclosure of negative information to the market and reflected in stock prices.  

While all three practices differ in various ways, the goal is the same; obtain the lowest possible exercise price for the recipient.  

Backdating law suits have proliferated.  The WSJ  Law Blog reported on June 19 that around 150 cases alleging backdating have been filed against companies so far.  A number of them have been brought under the federal securities laws and involve allegations of non-disclosure.  These cases often turn upon materiality.  See In re UnitedHealth Group Inc. PSLRA Litigation, No. 06-CV-1691, 2007 WL 1621456 order issued (D. Minn. June 4, 2007).  Some have moved into the criminal arena.  On June 18, the trial of former Brocade CEO Gregory Reyes began; which includes 10 felony counts of securities fraud.  Similarly, the former CEO of Take-Two has pled guilty to backdating charges.  

Most cases, however, have been brought as violations of the board's fiduciary obligations.  They turn, therefore, on state (read Delaware) law.  More specifically, they depend upon resolution of the demand excusal issue.  The three cases in Delaware deal with this issue.