Cnet options backdating
Because plaintiffs' purpose in this action is to obtain the particularized facts they need to adequately allege demand futility (rather than to investigate potential claims that plaintiffs have no standing to assert), plaintiffs may have access to certain documents pertaining to options granted before they owned shares.
This case, like so many others concerning backdated stock options, found its genesis in a March 18, 2006 article in the Wall Street Journal that suggested many large corporations were engaging in an options-granting practice that contravened corporate charters far and wide.
On June 27, 2006, CNET disclosed that its option granting practices were under investigation by the U. Attorney for the Northern District of California and by the Securities and Exchange Commission.
The next month, CNET announced that an internal investigation conducted by a special committee confirmed the CFRA report and announced that the company would need to restate its financial statements from 2003-05. 2007) (finding demand futile under the second prong of Aronson where the complaint's particularized facts showed that a majority of the current board sat on the compensation committee that granted backdated options in violation of the company's stock option plan).
Thus, all parties agree that plaintiffs have a proper purpose. ." Generally, this Court has "wide latitude in determining the proper scope of inspection," and this Court must "tailor the inspection to the stockholder's stated purpose." Defendant argues that plaintiffs should be barred from inspecting any books and records that predate plaintiffs' ownership of CNET stock. In Polygon, Vice Chancellor Lamb refused to grant an investigation under section 220 where the shareholder, an arbitrage fund, purchased shares in the West Corporation after an announced reorganization and then sought a books and records inspection to look into potential derivative claims in connection with the proposed reorganization plan.
This seeming simplicity notwithstanding, CNET opposed the demand for inspection, the parties battled over discovery via a contentious motion to compel, and only on the brink of trial did CNET agree to share certain documents with plaintiffs.
Plaintiffs, who are shareholders of CNET, initiated this action under 8 Del. § 220 to seek books and records relating to stock options backdating — a practice in which the company has already admitted it engaged — after being ordered to do so by a federal judge in California.
CNET's options issues first came to light in May 2006, when the Center for Financial Research and Accountability ("CFRA") published an analysis of option-granting practices of one hundred publicly traded companies.
The CFRA report specifically identified CNET as a company whose pattern of granting options indicated backdating.
Thus, to the extent that plaintiffs could plead with particularity facts demonstrating that a majority of the directors received backdated options, demand would be excused. All books and records showing the extent to which the CNET compensation committee delegated (or did not delegate) to management, either expressly or by custom and practice, the authority to select the exercise price or grant date of stock options under the 1997 plan and, if such delegation occurred, the extent to which the compensation committee was made aware of the exercise prices and dates selected.