Complaint Dismissed – Delaware Court Issues Significant Backdating Decision


Complaint Dismissed – Delaware Court Issues Significant Backdating Decision

On June 7, Vice Chancellor Strine of the Delaware Chancery Court issued a significant 75-page decision in a

stockholder’s derivative action alleging stock option manipulation. See Desimone v. Barrows, C.A. No. 2210-

VCS (Del. Ct. Ch. June 7, 2007) (“Sycamore Networks”). This decision is important for at least two key reasons: (1) it sets a high bar for plaintiffs to plead a derivative case; and (2) it casts serious doubt on two theories derivative plaintiffs have been asserting in stock option cases.

The Court, which dismissed plaintiff’s complaint for failure to make a demand on the board and failure to state

a cause of action, confirmed that under Delaware law, plaintiffs will be required to plead demand futility and

stock option timing manipulation with a high degree of particularity. The Court also suggested that claims for

breach of fiduciary duty based on “spring loading” (the practice of intentionally timing option grants to occur

shortly before the release of good news to the market) and “bullet dodging” (the process of awarding grants

shortly after the public disclosure of bad news) were unlikely to succeed absent unusual facts.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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