Delaware Court Chancellor William B. Chandler III, in another tough opinion in the case involving alleged stock-option backdating at Maxim Integrated Products, found that a corporate officer who knows about an improper practice but doesn’t report it could be subject to the court’s jurisdiction and held liable for damages.
In the case, Ryan v. Gifford, Chandler previously had expressed strong feelings that directors and officers complicit in setting phony strike dates for options may have breached their duties as fiduciaries. In the latest opinion, however, he extended the prospect of liability to cover “participation in the subsequent concealment of this practice from Maxim’s shareholders.”
Specifically, the chancellor allowed the case to continue against former Maxim CFO Carl W. Jasper, although the court didn’t rule on the merits of the claim by plaintiffs that Jasper was complicit, or that he was involved with concealing improperly granted options.
Chandler’s ruling appeared designed to show under what circumstances corporate officers and directors may be subject to the court’s personal jurisdiction, even though the operative date of the Delaware code governing that jurisdiction was Jan. 1, 2004. While he ruled that there was court jurisdiction over Jasper, the chancellor ruled that for six other current or former Maxim executives that jurisdiction did not apply.
In the case of the former Maxim CFO, the chancellor said that based on plaintiffs’ claims, “a reasonable inference may be drawn that Jasper engaged in deceptive conduct to conceal the backdating practice and that such deception is not consistent with the duty of loyalty he owed to Maxim’s shareholders.”
According to court filings, Jasper was CFO and vice president at Maxim from April 1999 to Jan. 31, 2007, when Maxim issued a press release announcing results of an investigation by a special committee of its board into stock-option-granting practices. The release noted deficiencies between mid-1995 and 2002, and as late as the end of the company’s fiscal 2006. “Perhaps not coincidentally, in the same press release, Maxim announced that Jasper had resigned as chief financial officer,” Chandler wrote.
Noting that it had been alleged that Jasper also sent confidential e-mails to five directors “regarding changing accounting firms and his desire to avoid a restatement resulting from disagreement with Maxim’s accounting policies,” Chandler wrote that “taken together, all these allegations might suggest that, not only did Jasper know of the backdating, but he also kept silent and concealed his knowledge in order to escape detection.”
An attorney for Jasper, Kevin Abrams of the firm of Abrams & Laster, told CFO.com that his client would decline comment “in light of the pending litigation before the Delaware court.”
A blog post by law-firm partner Travis Laster made some comments about the overall case, however. In the posting, he said that beyond having meaning for any corporate officer sued in Delaware, the ruling has a “more important and wide-ranging aspect” because of “the additional clarification on how a claim can be stated against an officer for involvement in stock option backdating.” Wrote Laster: “Practicioners investigating stock-option backdating or who are involed in stock option backdating litigation should take particular note of this ruling.”
Early this year in the Maxim case, Chandler wrote: “A director who approves the backdating of options faces at the very least a substantial likelihood of liability, if only because it is difficult to conceive of a context in which a director may simultaneously lie to his shareholders…and yet satisfy his duty of loyalty.” Further, he wrote that “backdating options qualifies as one of those rare cases [in which] a transaction may be so egregious on its face that board approval cannot meet the test of business judgment, and a substantial likelihood of director liability therefore exists.” Delaware’s business judgment rule grants wide latitude to executives and directors in making decisions, as long as they act with loyalty to the shareholders, and not in their own self-interest.