Steve Bainbridge posts on a “forthcoming” opinion from Delaware’s Chancellor Chandler concerning alleged backdating in Tyson Foods. Not sure what that “forthcoming” means, but in any event I haven’t seen the opinion. Here Steve notes that the Chancellor cites my blog that springloaded options are not insider trading, plus Steve’s blog presenting an argument the other way.
Of more interest is Steve’s discussion of the (same?) opinion dealing with derivative suit issues. Steve notes Chancellor Chandler's observations that disclosure violations inherent in backdating and deliberate violation of the plan are likely bad faith.
Steve notes quite rightly that the violation of the plan can be taken care of by invalidating the options. In other words, it’s just ultra vires – you don’t need to get into breach of fiduciary duty. Once the options are gone, where’s the harm? Yet once you call it bad faith, the directors face the serious problem of no protection under 102(b)(7).
While I agree with that reasoning, that still leaves the disclosure violation. This may, in fact, be a breach of fiduciary duty under Malone v. Brincat. Delaware has always taken disclosure seriously. This case illustrates why: even if the violation of the plan itself can be taken care of by invalidating the options, the shareholders still need some way to learn about the violation. The problem with the disclosure remedy, as the Delaware supreme court indicated in Malone, is fashioning the remedy.
This leads me to another issue. Steve's description of Chancellor Chandler’s opinion indicates why the Delaware courts are fully capable of dealing with issues like backdating per the state corporate governance contract. As I wrote in my article, Dabit, Preemption and Choice of Law, a Malone-type remedy could at least partially replace, and at least mitigate any need to expand, federal securities remedies.
Moreover, the availability of the state remedy makes even more dubious the expansion of federal criminal remedies to cover cases like backdating. I’d feel a whole lot more comfortable letting an experienced business judge like Chancellor Chandler evaluate the insiders’ conduct under the parties’ agreement and state law than turning the matter over to the circus of criminal prosecution.
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