Corporate Securities Law Blog

As we reported in May 2006 (link), prosecutors in recent years have been pressuring corporations to “cooperate” with prosecutions and investigations by denying indemnification and ceasing payment of defense costs of targeted individual officers and directors.  The Department of Justice was particularly proactive in pressing corporations to cease advancement of defense costs, citing a memorandum issued in 2003 to United States Attorneys by Deputy Attorney General Larry D. Thompson.  In the Thompson Memorandum, the DoJ indicated that “the corporation’s . . . willingness to cooperate in the investigation of its agents” would hinge, at least in part, on “whether the corporation appears to be protecting its culpable employees and agents” by, inter alia, advancing attorney fees.

In In re CheckFree Corporation Shareholders Litigation, No. 3193-CC (Del. Ch. Nov. 1, 2007), Delaware Chancellor Chandler denied plaintiff shareholders’ motion to preliminarily enjoin a merger between CheckFree Corporation and Fiserv, Inc.  In his opinion, Chancellor Chandler held that while “directors have a duty to disclose all material information in their possession to shareholders when seeking shareholder approval for some corporate action,” that duty does not go so far as to require disclosure of all of the internal projections prepared by management of the target corporation that were shared with the acquirer and the target’s financial adviser.  In addition, Chancellor Chandler noted that “the public interest requires an especially strong showing” by a shareholder plaintiff of a likelihood of success on the merits and a threat of irreparable harm where the transaction sought to be enjoined is “a premium transaction in the absence of a competing bid.”  The CheckFree decision largely reaffirms settled Delaware law on these and other issues, while sending a strong signal to the plaintiffs’ bar that shareholder plaintiffs face a very high burden when challenging “a premium transaction in the absence of a competing bid.”

In In re Tyson Foods, C.A. No. 1106-CC (Del. Ch. Aug. 15, 2007), Chancellor Chandler held that granting “spring-loaded” stock options to key directors and executives without full disclosure of the practice is a breach of the directors’ fiduciary duties.  In rejecting defendants’ motion for judgment on the pleadings dismissing the consolidated class action and derivative complaints, Chandler stated that the defendants failed to rebut the pleading stage inference that they “intended to conceal a pattern of unfairly stocking up insiders’ larders” with option grants right before the announcement of events likely to increase the company’s stock price.  This decision would seem to support the notion, often dismissed by commentators, that the practice of granting “spring-loaded” stock options is improper per se, particularly in the absence of detailed disclosures.