Delaware Court of Chancery issues two important decisions on stock options backdating, spring‐loading and bullet‐dodging

Abstract

Purpose

The purpose of this paper is to describe the implications of two recent decisions in Ryan v. Gifford and In Re Tyson Foods, Inc. concerning stock options backdating, “spring‐loading,” and “bullet‐dodging.”

Design/methodology/approach

The paper summarizes the facts of the two cases, defines spring‐loading and bullet‐dodging, and explains how the court held in both cases that plaintiffs had sufficiently alleged demand futility, that directors of the two corporations had shown bad faith and breached their duty of loyalty, and that the doctrine of fraudulent concealment took precedence over the statute of limitations.

Findings

The paper finds that backdating of options is so egregious that board approval cannot meet the test of business judgment and there is a substantial likelihood of director liability. A director who intentionally uses inside knowledge not available to shareholders in order to enrich employees while avoiding shareholder‐imposed requirements cannot be said to be acting loyally and in good faith as a fiduciary. The best practice for companies is only to grant options that are in strict compliance with their shareholder‐approved option plans as well as applicable accounting, tax, and disclosure rules, and on either fixed‐in‐advance dates or when the companies' insiders would be free to trade.

Originality/value

The paper provides a thorough explanation of two of the most important court decisions to date on stock options backdating, spring‐loading, and bullet‐dodging.

Citation

Alexander, S., Rissier, W. and Chun, S. (2007), "Delaware Court of Chancery issues two important decisions on stock options backdating, spring‐loading and bullet‐dodging", Journal of Investment Compliance, Vol. 8 No. 2, pp. 35-38. https://doi.org/10.1108/15285810710759461