Expanded Pleadings in Weiss v. Swanson

Expanded Pleadings in Weiss v. Swanson

 
In this Expert Commentary, Donald J. Wolfe and Michael A. Pittenger describe the Delaware Court of Chancery’s expansion of the pleading standards applicable to claims of breach of fiduciary duty for "spring-loading" and "bullet-dodging" in connection with the issuance of stock options.
 
The authors write: The plaintiff alleged in his complaint that the directors, knowing that the company’s quarterly earnings releases historically had resulted in significant changes in the company’s stock price, timed the issuance of the challenged grants to maximize the benefits to the recipients (who included certain of the directors) by issuing them in advance of positive releases and in the wake of releases that contained negative information. Plaintiff asserted that, while such practices might be deemed an entirely appropriate method of effecting corporate compensation, they were in this instance both undisclosed and contrary to the spirit of the authorizing plans and to the expectations of the stockholders who approved them. He sought compensation from the resulting harm to the corporation, in particular the artificial lowering of the exercise price for the options and the attending reduction in consideration the company received when the options were ultimately exercised. Plaintiff further alleged that the directors had breached their duty by causing the issuance of proxy statements that failed to disclose that options had been issued pursuant to this practice, and asserted claims for waste and unjust enrichment.
 
Defendants moved to dismiss the derivative complaint arguing that demand on the board had not been made as required by Chancery Court Rule 23.1. They also asserted that the complaint in all events failed to state a claim in that it failed to allege that the directors had material inside knowledge or that the had acted with the intent of evading the requirements of the option plans, elements required in connection with a claim for spring-loading or bullet-dodging by the holding in In re Tyson Foods, Inc. Consolidated Shareholder Litigation. They further contended that the statute of limitations had expired with respect to 14 of the 22 challenged grants.
 
The Court rejected the argument that demand was required, relying on two grounds: first, because the complaint gave rise to a reasonable doubt that the challenged decisions were the product of a valid exercise of business judgment; and, second, because all five of the directors to whom a demand would have been directed had been awarded challenged option grants and therefore suffered from a conflict of interest in connection with the decision whether to initiate litigation to challenge those grants. [footnotes omitted]