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Court of Chancery Blasts Backdating Options

Posted In Fiduciary Duty

Ryan v. Gifford C.A. No. 2213-N (Del. Ch. February 6, 2007).

Backdating of stock options has long been under fire. This decision spells out the legal theories under Delaware law that support a breach of fiduciary duty claim for backdating. In addition, the opinion also seems critical of similar practices such as "springloading" option grants. Moreover, by characterizing the backdating of options as constituting "bad faith", under the facts presented in this case,  the opinion removes the protection of the director exculpation provisions provided in many charters.

This decision has some unusual facts that may distinguish it from the other backdating cases that have been reported. For as the decision notes, the actual provisions of the stock option plan under review may provide a breach of contract claim for violation of those provisions. The Court of Chancery has been critical of conduct that violates a certificate of incorporation provision, such as limits on the number of shares to be issued, and that critical approach is now carried over to stock option grants that do not follow the terms of the option plan. Share

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