Delaware Law Updates
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Weiss v. Swanson et al., C.A. No. 2828 (Del. Ch. Mar. 7, 2008) (V.C. Lamb)

March 7, 2008

In this decision, the Court of Chancery rejected a motion to dismiss a derivative complaint challenging option grants made pursuant to stockholder-approved option plans. The plaintiff alleged in his complaint that stock option grants made by the board of Linear Technology Corporation (“Linear”) were strategically timed in order to take advantage of stock prices favorable to the defendants: when the Company anticipated issuing favorable quarterly earnings releases, the director defendants “spring-loaded” the options by granting them just before they were released, and when the releases contained negative information, options were granted just after the release of the information – “bulletdodging.” In its decision, the Court rejected the defendants’ motion to dismiss for demand excusal and for failure to state a claim upon which relief may be granted. The Court also rejected the claim that plaintiff’s complaint was barred by the statute of limitations. The Court first addressed whether the plaintiff was obligated to make a pre-suit demand on the board under Delaware Court of Chancery Rule 23.1. The Court found that the plaintiff alleged particularized facts sufficient to raise reasonable doubt under both prongs of Aronson v. Lewis. First, plaintiff raised reasonable doubt that the decisions authorizing the option grants and failing to disclose the grants to Linear’s stockholders were a valid exercise of the board’s business judgment. Plaintiff’s particularized claims sufficiently alleged that the director defendants had access to the quarterly earnings releases before they became public and knew that the releases materially affected Linear’s stock price, that the releases actually did affect the stock price, and that, in 22 out of 28 option grants made in conjunction with quarterly earnings releases, the option grants were approved before positive releases or after negative releases. The complaint further alleged that the director defendants had failed to disclose this information to Linear’s stockholders. Second, plaintiff raised reasonable doubt that the directors were disinterested and independent. Citing Conrad v. Blank, the Court found that the board was interested and demand was excused because the directors received the challenged options and thus “they have a strong financial incentive to maintain the status quo by not authorizing any corrective action that would devalue their current holdings or cause them to disgorge improperly obtained profits.” The Court next addressed the defendants’ motion to dismiss for failure to state a claim. The Court rejected this motion, finding that because the plaintiff had alleged particularized facts sufficient to prove demand futility under the second prong of Aronson, he had rebutted the business judgment rule for the purposes of surviving a motion to dismiss. The Court further found that the plaintiff had stated claims for breach of fiduciary duty, for unjust enrichment, and for waste. Finally, the Court rejected the argument that the complaint was barred by the statute of limitations because the statute was tolled by the fraudulent concealment by the defendants of the spring-loading and bullet-dodging plan, and because it was equitably tolled.

The full opinion is available here