Wednesday, February 14, 2007
Springloading at Tyson
On February 6, Delaware Chancellor Chandler ruled on several issues in a case against Tyson Foods. Among the issues addressed were:
1. Futility of pre-suit demand;
2. Tolling of the statute of limitations; and
3. Whether the business judgment rule protected directors from liability for issuing springloaded options.
Springloaded options are those granted just prior to the announcement of positive news. In other words, options are granted at today's price but with near certainty that today's price is too low. This creates an almost automatic built-in gain for the executives receiving the options.
On the springloading issue, Chancellor Chandler noted that "A committee of independent directors enjoys the presumption that its actions are prima facie protected by the business judgment rule." In this case, though, plaintiffs appear able to overcome this strong presumption.
Chancellor Chandler described granting of springloaded options as a "much more subtle deception" than backdating, which has received a lot of press in the past few months. But, according to Chandler, "[g]ranting spring-loaded options, without explicit authorization from shareholders, clearly involves indirect deception. A director's duty of loyalty includes the duty to deal fairly and honestly with the shareholders for whom he is a fiduciary. It is inconsistent with such a duty for a board of directors to ask for shareholder approval of an incentive stock option plan and then later to distribute shares to managers in such a way as to undermine the very objectives approved by the shareholders. This remains true even if the board complies with the strict letter of a shareholder-approved plan as it relates to strick prices or issue dates."
The Chancellor views the question before the court as one of bad faith and breach of the directors' duties, rather than as a question of violation of the federal securities laws. Based on the plaintiffs' adequate allegations of breach of fiduciary duty and bad faith, the Chancellor denied the defendants' motion to dismiss that count of the complaint.
By way of background, the SEC has gone after Tyson before on various issues. In 2004, the SEC investigated Tyson's inadequate disclosures regarding perquisites to Don Tyson and John Tyson. The SEC determined that from 1997 to 2003, Tyson's proxy statements were incomplete and misleading.
Tyson has also litigated important matters in Delaware previously. When Tyson agreed to purchase IBP, it put a "material adverse change" clause into the purchase agreement. Then, when Tyson learned that the SEC had issued a comment letter about IBP's financials, Tyson tried to back out of the deal. Protracted litigation ensued, with the Delware courts eventually telling Tyson it had to move forward with the deal. Then, the Compensation Committee at Tyson gave the executives cushy bonuses for doing the deal they fought so hard to avoid.