In re Tyson and Spring Loaded Options: Disclosure Is the Key

This opinion by Chancellor Chandler is part of the ongoing litigation involving current and former Tyson Foods directors; In re Tyson, WL 2351071 (Del. Ch. Aug. 15, 2007). The board has been accused of, among other things, spring loading option grants to key employees and directors, a topic we have covered in an earlier post. This most recent opinion denies the defendants’ motion for judgment on the pleadings, and clarifies some of the Chancellor’s earlier holdings regarding spring loading of stock option grants.

While in the consolidated complaint the plaintiff alleged that the shareholder approved plan required all option grants to be at full market value, partial discovery revealed that the plan in fact did not impose this requirement for all options issued under the plan. The challenged option grants, therefore, arguably did not violate the terms of the plan. In his prior opinion, Chancellor Chandler had indicated that a violation of the plan was one of the requirements for a derivative action involving spring loaded options.

Nonetheless, this was not enough to absolve the Tyson board from liability. “When the option grants were later revealed to shareholders, however, defendants did not straightforwardly describe such strike-price prestidigitation. Rather, they provided minimal assurances to investors that these options rested within the limits of the shareholder-approved plan.”

This led the court to place greater emphasis on the disclosure aspect of spring loading:

• ". . . I am not convinced that allegations of an implicit violation of a shareholder-approved stock incentive plan are absolutely necessary for the Court to infer that the decision to spring-load options lies beyond the bounds of business judgment. Instead, I find that where I may reasonably infer that a board of directors later concealed the true nature of a grant of stock options, I may further conclude that those options were not granted consistent with a fiduciary’s duty of utmost loyalty."

The Chancellor went on to assure that his holding was in line with that of Vice Chancellor Strine’s in Desimone v. Barrows, 924 A.2d 908, 918 (Del. Ch. June 7, 2007), which we have covered here. The court compared the conduct of the Tyson board to the hypothetical scenarios described in Desimone where a board could engage in spring loading yet not breach its fiduciary duty. The key difference here from those scenarios was the level of disclosure by the board.

In the Desimone hypotheticals, it was assumed “that the board of directors has revealed their strategy to shareholders in complete and utter candor,” while here, “the magnitude and timing of the grants, when accompanied with no disclosure of the reasons motivating the grants, is suggestive, at the pleading stage, of a purposeful subterfuge.”

Whether the opinion in Tyson can be so easily reconciled with the language by Chancellor Strine in Desimone is an open question.

The court’s opinion and other primary materials can be found on the DU Corporate Governance website.