More on Chandler on spring-loading

In re Tyson Foods, Inc., C.A. No. 1106-N, Chancellor Chandler, in a broad opinion dealing with several types of corporate misconduct, had some interesting remarks on spring-loaded options – that is, options granted prior to the public disclosure of material inside information.

As noted above, the Chancellor cited one of my earlier posts on whether the springloading is insider trading. I pointed out there that this might be the case under Texas Gulf Sulphur if the director had the information but the board didn’t. But I added that “if the board had the info, and has otherwise performed its duty under state law granting the compensation, no problem.”

Chancellor Chandler deals with the possibility that the board has not performed its duty. He says that where the options are awarded pursuant to a shareholder-approved plan:

A plaintiff must allege that the directors that approved spring-loaded (or bullet-dodging) options (a) possessed material non-public information soon to be released that would impact the company’s share price, and (b) issued those options with the intent to circumvent otherwise valid shareholder-approved restrictions upon the exercise price of the options. Such allegations would satisfy a plaintiff’s requirement to show adequately at the pleading stage that a director acted disloyally and in bad faith and is therefore unable to claim the protection of the business judgment rule. Of course, it is conceivable that a director might show that shareholders have expressly empowered the board of directors (or relevant committee) to use backdating, spring-loading, or bullet-dodging as part of employee compensation, and that such actions would not otherwise violate applicable law. But defendants make no such assertion here.

So these are the rules for state liability. What about federal liability? Perhaps if there’s a breach of the directors’ duty under state law, this could make the option award a misuse of corporate information and thereby trigger federal liability under the misappropriation theory.

Once again, as noted in my previous post, federal and state law are intertwined. It would be best if we could leave these fiduciary issues to state law. But since we haven’t, expect federal and state law to trip over each other. In any event, as I've said, it's worth keeping in mind the availability of the state remedy, as well as federal civil liability, in deciding whether we need to resort to the criminal law.

Update: Here are the links to both the Tyson opinion and the Ryan opinion on backdating (thanks to Francis Pileggi).