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Wandel v. Eisenberg

Supreme Court of New York, Appellate Division, First Department

January 13, 2009, Decided

603665/06, 4008

Opinion

 [*78]  [**103] Saxe, J.P.

Following this Court's recent reinstatement of a shareholder derivative action based upon [****2]  claims that a majority of the board of directors knew or had enough specific information that they should have known of the company's practice of backdating stock options (see Matter of Comverse Tech., Inc. Derivative Litig., 56 AD3d 49, 866 NYS2d 10 [2008]), we must now further consider the amount of knowledge and information necessary to establish demand futility.

In the wake  [***2] of a wave of publicity disclosing that numbers of public companies had been backdating stock option grants, in June of 2006 two securities analysts, Merrill Lynch and Deutsche Bank, issued reports identifying nominal defendant Bed Bath & Beyond as a company whose stock option grant dates aroused suspicion of backdating. On June 19, 2006, the board of directors of Bed Bath & Beyond appointed a special committee of two independent directors to conduct an investigation.

On September 20, 2006, counsel for the special committee notified the Securities and Exchange Commission (SEC) of its review, and the SEC commenced its own informal inquiry. On October 10, 2006,  [**104] Bed Bath & Beyond made public the findings of its special committee, which had "identified various deficiencies in the process of granting and documenting stock options."  [*79] The report acknowledged that "[s]ome hindsight was used in selecting some annual grant dates." Specifically, "[e]xcluding grants only to Form 4 filers beginning in 2003, almost all annual grant dates in 1998-2004 likely were selected with some hindsight," although this "hindsight" was relatively slight, in that grant dates were selected within a few trading days after the recorded date, and the individuals  [***3] who selected the dates did not "appreciate the accounting or disclosure implications of the practices used for selecting those dates." Similarly, the special committee found that the people responsible for accounting and disclosure functions at the company were unaware of any of the improper date selection practices. It concluded that no person involved in the grant process had engaged in willful misconduct and, in particular, that the cochairmen and chief executive officer believed that they were acting in the best interests of the company with the purpose of attracting and retaining employees.

Following the issuance of the report, the company adopted new controls in its stock option awards process. It also performed a financial analysis of the effect of adjusting for the option misdating. It determined that the adjustment of compensation charges for those years would have no material effect on its past financial statements, but that adjustment of the equity section of its consolidated balance sheet would be necessary. In addition, it reset the prices of unvested options to the appropriate levels.

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60 A.D.3d 77 *; 871 N.Y.S.2d 102 **; 2009 N.Y. App. Div. LEXIS 112 ***; 2009 NY Slip Op 115 ****

 [****1] Arnold Wandel, Derivatively on Behalf of Bed Bath & Beyond, Inc., Appellant, v Warren Eisenberg et al., Respondents, and Bed Bath & Beyond, Inc., Nominal Defendant-Respondent.

Prior History: Appeal from an order of the Supreme Court, New York County (Charles E. Ramos, J.), entered May 18, 2007. The order granted defendants' motion to dismiss the amended complaint.

Wandel v Eisenberg, 2007 NY Slip Op 31270(U), affirmed.

Wandel v. Eisenberg, 2007 N.Y. Misc. LEXIS 4086 (2007)

CORE TERMS

futility, backdating, stock option, options, allegations, board of directors, particularity, Derivative, issuance

Business & Corporate Law, Actions Against Corporations, Derivative Actions, General Overview, Civil Procedure, Class Actions, Demand Futility, Procedural Matters, Demand Requirement