RYAN V. GIFFORD
918 A.2d 341 (Del.Ch. 2007)
NATURE OF THE CASE: Ryan (P), shareholder, filed a derivative action against Gifford
(Ds), the corporate board and compensation committee members, for an alleged breach of their
duties of due care and loyalty in approving or accepting backdated options in violation of a
stock option plan and stock incentive plan. The members moved to stay the action in favor of
earlier filed federal actions in California; alternatively, they moved to dismiss the action
on its merits.
FACTS: Maxim Integrated Products is a manufacture of linear and mixed-signal integrated
circuits used in microprocessor-based electronic equipment. Maxim's board of directors and
compensation committee granted stock options for the purchase of millions of shares of
Maxim's common stock to Gifford (D), founder, chairman of the board, and chief executive
officer, pursuant to shareholder-approved stock option plans filed with the Securities and
Exchange Commission. Maxim represented that the exercise price of all stock options granted
would be no less than the fair market value of the company's common stock, measured by the
publicly traded closing price for Maxim stock on the date of the grant. P is a shareholder
of Maxim and has continuously held shares since his Dallas Semiconductor Incorporated shares
were converted to Maxim shares upon Maxim's acquisition of Dallas Semiconductor on April 11,
2001. P filed this derivative action on June 2, 2006, against Ds, members of the board and
compensation committee at all relevant times. P alleges that nine specific grants were
backdated between 1998 and 2002, as these grants seem too fortuitously timed to be explained
as simple coincidence. All nine grants were dated on unusually low (if not the lowest)
trading days of the years in question, or on days immediately before sharp increases in the
market price of the company. Merrill Lynch determined that management of Maxim was
remarkably effective at timing options pricing events. Merrill Lynch found that the
twenty-day return on option grants to management averaged 14% over the five-year period, an
annualized return of 243%, or almost ten times higher than the 29% annualized market returns
in the same period. The Merrill Lynch report formed the bases for other derivative lawsuits.
The suits were consolidated. All four derivative plaintiffs have stipulated to consolidate
and agreed to a lead plaintiff and lead counsel structure. P alleges that Ds breached their
fiduciary duties to Maxim and its shareholders. Ds moved to stay. Ds also seek dismissal
under numerous theories. Ds allege that P fails to meet his burden of pleading demand
futility with particularity because P does not show that the companies' directors were
incapable of making an impartial decision regarding litigation. Ds state that P lacks
standing to assert seven of his nine claims because he was not a shareholder when those
challenged transactions occurred. Ds assert that P fails to state a claim for breach of
fiduciary duty because P fails to rebut the business judgment rule. Ds contend that the
statute of limitations bars the claim and cannot relying on any tolling doctrines because
all relevant information was public. Ds assert that P's unjust enrichment claim fails
because P does not allege the manner in which D was unjustly enriched. P never suggests that
D has exercised any of the allegedly backdated options or sold any stock.
ISSUE:
RULE OF LAW:
HOLDING AND DECISION:
LEGAL ANALYSIS:
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