Delaware Judge Allows Derivative Suit in Backdating Case to Proceed - Have the Flood Gates Been Opened?
Influential Delaware Chancery Court Judge William Chandler issued a strongly worded opinion last week that securities insiders believe will open the door for a flood of new shareholder derivative lawsuits against companies alleged to have backdated stock options. Until now, there have only been a handful of opinions on derivative suits in backdating cases, and in general they have swung in favor of defendants.
In the unpublished opinion released last week, Ryan v. Gifford, No. 2213-N, 2007 WL 416162 (Del. Ch. Feb. 6, 2007), Judge Chandler ruled that claims brought by a shareholder of chipmaker Maxim Integrated Products against several current and former board members could go forward despite defendants’ objections. In particular, two points from Judge Chandler’s opinion are likely to influence future shareholder derivate lawsuits in backdating cases.
First, Judge Chandler rejected outright defendants’ contentions that plaintiff’s allegations failed to demonstrate that defendants acted intentionally or in bad faith. Explained the Judge in no uncertain terms, “I am unable to fathom a situation where the deliberate violation of a shareholder approved stock option plan and false disclosures, obviously intended to mislead shareholders into thinking that the directors complied honestly with the shareholder-approved plan, is anything but an act of bad faith.”
Second, Judge Chandler rejected defendants’ statute of limitations defense. Because none of the challenged transactions occurred within the limitations period, plaintiff was forced to rely on defendants’ alleged fraudulent concealment to toll the limitations period. But plaintiff acknowledged in his complaint that he was relying in part on a report issued by Merrill Lynch analyzing Maxim’s stock option grants – a report that was prepared using only publicly available information. Accordingly, defendants argued that because the information supporting plaintiff’s claims was publicly available, there was no basis for plaintiff to claim that the information was fraudulently concealed. The court rejected defendants’ cute but legalistic argument and held that defendants’ fraudulent concealment tolled the limitations period. The Judge explained that while shareholders may be expected to exercise reasonable diligence with respect to their shares, “this diligence does not require a shareholder to conduct complicated statistical analysis in order to uncover alleged malfeasance.”
