Tuesday, February 26, 2013

Ryan v. Gifford case brief

Ryan v. Gifford case brief summary
918 A.2d 341

SYNOPSIS: Plaintiff shareholder filed a derivative action against defendants, the corporate board and compensation committee members, for an alleged breach of their duties of due care and loyalty in approving or accepting backdated options in violation of a stock option plan and stock incentive plan. The members moved to stay the action in favor of earlier filed federal actions in California; alternatively, they moved to dismiss the action on its merits.

OVERVIEW: The shareholder alleged that grants of stock options to the founder of the corporation were backdated, as the grants were too fortuitously timed to be explained as coincidence. The compensation committee which approved the transactions was composed of three of the six corporate directors under Del. Code Ann. tit. 8, § 141.

The court found that the stay request was to be denied as Delaware had an overwhelming interest in resolving questions of first impression under Delaware law and the doctrine of forum non conveniens did not require the stay.

Additionally, the shareholder provided sufficient particularity in the pleading to survive a motion to dismiss for failure to make demand under Del. Ch. Ct. R. 23.1. Further, there were sufficient allegations to raise a reason to doubt the disinterestedness of the board. In addition, the complaint alleged bad faith and, thus, a breach of the duty of loyalty sufficient to rebut the business judgment rule and survive a motion to dismiss. However, the shareholder lacked standing under Del. Code Ann. tit. 8, § 327 to assert claims arising before he became a shareholder. Finally, the action was not time-barred under Del. Code Ann. tit. 10, § 8106.

OUTCOME: The court granted the motion to dismiss all claims arising before the shareholder became a shareholder by way of a merger. The court denied the remainder of the motion to stay or dismiss.

Backdating - company issuing stock options to an executive on one date while providing fraudulent documentation asserting the options were issued earlier.
P alleges that D breached duties of care and loyalty by approving/accepting backdated options that violated the shareholder-approved stock option plan.  
-Technology company board granted stock options for purchase of shares of common stock to D.
-Maxim contracted/represented that that exercise price of options would be no less than fair market value of companies common stock,
-P is a shareholder, alleges that 9 grants were backdated (all on the lowest trading days of the years in question).
(court says timing is too fortuitous to be mere coincidence.)
The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was the best interest of the company.  
Show board breached either FIDUCIARY DUTY OF DUE CARE or its FIDUCIARY DUTY OF LOYALTY in connection with a challenged transaction (may rebut business judgment rule).
-Acts taken in bad faith breach the duty of loyalty.
Bad faith may be shown where:
1.  the fiduciary acts with the intent to violate applicable positive law.
2.  the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.
3.  Any action that demonstrates a faithlessness or lack of true devotion to the interests of the corporation and its shareholders.

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