Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Tuesday, April 17, 2007

What Backdating is Not

Judge Alsup of the N.D. of California issued a decision on April 11 in In re CNET Networks, Inc. Shareholder Derivative Litigation. Judge Alsup reviewed the option grant practices at CNET. He noted that companies might use an incorrect grant date for reasons other than fraud. In particular, the court declined to infer backdating where the grants were issued under a plan with a pre-determined grant date, such as annual option grants to directors. Where Form 4s are filed in a timely manner, grants are made to new employees or in connection with a merger, this is further evidence that the grants were not backdated.

Judge Alsup noted that CNET's board appointed a special committee to investigate allegations of backdating and that the company repriced some options and restated financials. Because of these corrective actions, the court could not -- without more -- infer that a fraud occured.

The plaintiffs had already amended their complaint numerous times. The court invited briefing on the issue of whether plaintiffs should be allowed to conduct limited discovery on the issue of whether the members of the compensation committee were aware of backdating.

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