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Delaware Chancery Court, yet to rule on shareholder claims that the company wrongly granted options expecting that future news would boost the stock price, opines sharply on board's "uncanny parsimony with the truth."
Roy Harris, CFO.com | US
August 20, 2007
Tyson Foods Inc. got another chance for Delaware's Court of Chancery to throw out claims that the company improperly spring-loaded stock-option grants, dating options ahead of favorable company news so the value would likely rise. But the judge slapped the Tyson board down with harsh suggestions that it acted with "disloyalty that could not have arisen from a good faith business judgment."
Chancellor William B. Chandler III's sharp words came in an Aug. 15 opinion in the shareholder derivative litigation In Re Tyson Foods, in which investors had challenged three option grants between 2001 and 2003 by directors of the Springdale, Ark.-based food producer. In Chandler's first opinion, in February, the judge let the spring-loading contention in the shareholders' suit stand, although he contrasted the spring-loading allegations with those involving backdating by saying that spring-loading entails "much more subtle deception" by a board.
In the second ruling, coming in response to a second Tyson attempt to win a judgment in its favor, Chandler himself dispensed with subtlety — almost.
The jurist, noted for his cleverly worded opinions, rejected what he called an argument by Tyson that "deceptive or deficient proxy disclosures cannot form the basis of a derivative claim challenging the grant of these options," and that the proxy disclosures are "temporally and analytically distinct from the options grants themselves."
Wrote Chandler: "Proxy statements that display an uncanny parsimony with the truth are not 'analytically distinct' from a series of improbably fortuitous stock option grants, but rather raise an inference that directors engaged in later dissembling to hide earlier subterfuge. The Court may further infer that grants of spring-loaded stock options were both inherently unfair to shareholders and that the long-term nature of the deceit involved suggests a scheme inherently beyond the bounds of business judgment."
A Tyson spokesman, asked for a response, said in an email that the company "is still reviewing the decision."
The opinion on the Tyson motion continues what seems to be a string of pro-shareholder rulings from the influential business court that has long been known for supporting management and board decisions, citing the business judgment rule's protection as long as executives and directors act in good faith and show fiduciary loyalty to shareholders.
In the latest Tyson opinion, Chandler said plaintiffs had argued that because of pending positive news the Tyson board knew the share price would climb each time they dated the options grants, but that "defendants did not straightforwardly descibe such strike-price prestidigitation," in the judge's words. "The crux of defendants' argument is that a scheme that relies upon bare formalism concealed by a poverty of communication somehow sits within the scope of reasonable, good faith business judgment," Chandler continued. "At this juncture, and based solely on the pleadings and the public documents, I cannot agree."
Chandler cited his opinion's consistency with a description of possible executive scenarios presented in a previous opinion, by Vice Chancellor Leo E. Strine Jr., in Desimone v. Barrows. In that opinion, Strine "imagines a circumstance in which a COO and CFO of a corporation involved in a merger of equals have 'missed their summer vacations, their children's baseball games, and every important family occasion for four months'" in doing their merger work. "In recognition of this sacrifice, a hypothetical compensation committee awards each officer a grant of stock options in advance of the merger announcement, knowing that those options will almost immediately increase in value and, indeed, insist that the options may be immediately exercised in the event of the forthcoming merger," Chandler wrote in summarizing his colleague's opinion.
Yet in Strine's scenarios, even those questionable actions by a board assume that directors have "revealed their strategy to shareholders in complete and utter candor," Chandler wrote. Based on "the actual allegations before the Court in this case, defendants' disclosures are too sparse" to fit Strine's hypothetical scenarios.
Both the Delaware Supreme Court and his own Chancery Court, according to Chandler, have used strong words to describe the duty of directors as shareholder fiduciaries. "Loyalty. Good faith. Independence. Candor. These are words pregnant with obligation," Chandler wrote. "The Supreme Court did not adorn them with half-hearted adjectives. Directors should not take a seat at the board table prepared to offer only conditional loyalty, tolerable good faith, reasonable disinterest or formalistic candor."