Backdating, the Delaware Courts, and a Guest Appearance of Common Sense: Conrad v. Blank

We criticize the Delaware courts because of a lack of judicial temperament and a resolute anti-shareholder approach.  So, when we see a decision that reflects neither of these propositions, it ought to be mentioned.  In Conrad v. Blank, 2007 Del. Ch. LEXIS 130 (Del. Ch. Sept. 7, 2007), Vice Chancellor Lamb wrote a thoughtful opinion in the backdating area. After the desultory opinion in Desimone, one where Vice Chancellor Strine did everything he could to validate backdating and spring loading as just another form of compensation, Vice Chancellor Lamb constructed a decison in a dispassionate tone with a common sense resolution.  

The case involved allegations by Staples that the company had engaged in impermissible backdating.  The suit was filed only after the company conducted an investigation, acknowledged the use of "incorrect measurement date," took a $10.8 million charge against earnings, and essentially took no action against anyone in the company for the practice.  In assessing the likelihood that this board would fairly manage a derivative suite, VC Lamb noted:  "Given the finding of erroneous dating practices (by inference, backdating), the court questions how it is that the interests of the corporation are not, or at least do not appear to be, adverse to the interests of the individual defendants." 

VC Lamb also accepted the plaintiffs' circumstantial evidence (including statistical data) of knowledge by directors on the compensation committee of the backdating.  In other words, he did not do what VC Strine did in Desimone and impose an excessively high pleading standard designed to dismiss backdating cases.  The court in Conrad made the common sense decision that the case could go to discovery, allowing the parties to uncover the actual involvement and knowledge of the directors in the backdating practices.  If, after discovery, the evidence shows they had no knowledge, the case may still be dismissed. 

This Blog does not promote standards designed to encourage frivolous suits against directors.  But it does promote meaningful standards of behavior.  The fact that a board could, in the case of Staples, discover what appeared to be problems with backdating, that resulted in a $10.8 million charge against earnings, and do "nothing to remedy those past 'errors'" shows how little it thinks Delaware law requires.  Presumably the board thought that its behavior met the low standards applicable in Delaware. 

VC Lamb has told them otherwise.  It will help in encouraging boards to investigate backdating and take appropriate actions once uncovered.

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