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Court Rulings Set Stage for Backdating Suits

March 09, 2007

Kevin Muck, co-chair of Fenwick & West's Securities Litigation Group, was recently quoted in a Compliance Week story entitled, "Court Rulings Set Stage For Backdating Suits."

The Delaware Chancery Court issued two rulings earlier this month that suggest the nation's most influential tribunal on corporate law is going to be tough on companies embroiled in litigation over stock option backdating.

The two cases, one against chip manufacturer Maxim Integrated Products and the other involving Tyson Foods, rejected the argument that companies are shielded from backdating-related complaints under the business judgment rule. The Tyson case also allowed complaints to proceed against specific officers and directors and squarely put "springloaded" grants—where options are issued ahead of good news that pushes a stock price higher—in the same disapproving light as options backdated to inflate their value artificially.

Both rulings are preliminary, allowing civil litigation to proceed. But Kevin Muck, a partner with the law firm Fenwick & West, cautions that "the tone of some of the language" used by the court was "perhaps unduly sweeping." In particular, Muck notes a passage in which the court says that "all" backdated options "involve a fundamental incontrovertible lie."

Muck says corporate defendants may have reason to worry that the court allowed the lawsuits to go forward in that state even though other litigation is pending elsewhere. "In light of these decisions, you might have plaintiffs bringing suit in Delaware even when there's already a suit filed [elsewhere]," Muck says. "Essentially, you can have the same claims being litigated on parallel tracks 3,000 miles apart. That's obviously less than optimal."

Read the entire article, by Compliance Week reporter Paul Martinek.