In re Tyson, Spring Loaded Options, and Bad Faith

In a decision handed down on the same day as Ryan, Chancellor Chandler allowed portions of a claim against current and former members of the Tyson Foods board of directors go forward. While there were also allegations of improper compensation to Don Tyson and related-party transactions, this summary will focus on alleged “spring loading” of stock option grants by the board of directors between 1999 and 2001.

In applying Aronson (the case setting out the test for demand excusal), the court concluded that the board was not independent or disinterested, excusing demand. Chancellor Chandler, therefore, devoted most of the opinion to the motion to dismiss the substantive claims.

With respect to the allegations of spring loaded options, the court conceded that the seven defendant directors on the compensation committee accused of improperly issuing the options were not interested in any of the transactions. This forced an analysis under the duty of loyalty and whether the directors aced in good faith. The court went on to hold; “It is inconsistent with such a duty[of loyalty] for a board of directors to ask for shareholder approval of an incentive stock option plan and then later to distribute shares to managers in such a way as to undermine the very objectives approved by shareholders.” The Chancellor went on to hold, “A director who intentionally uses insider knowledge not available to shareholders in order to enrich employees while avoiding shareholder-imposed requirements cannot, in my opinion, be said to be acting loyally and in good faith as a fiduciary.”

The court was, however, careful to narrow its decision. The court created a two part test that a plaintiff must sufficiently plead in order to survive a motion to dismiss.

• “First, a plaintiff must allege that options were issued according to a shareholder-approved employee compensation plan. Second, a plaintiff must allege that the directors that approved spring-loaded (or bullet-dodging) options (a) possessed material non-public information soon to be released that would impact the company’s share price, and (b) issued those options with the intent to circumvent otherwise valid shareholder-approved restrictions upon the exercise price of the options.”

This, Chancellor Chandler added, would be sufficient to show at the pleadings stage that “a director acted disloyally and in bad faith and is therefore unable to claim the protection of the business judgment rule.” In other words, the essence of the violation was a deliberate circumvention of the requirements of the terms of the plan.

There are two more points that are noteworthy. First, the court did contemplate a scenario where shareholders “expressly empower” the board to engage in improper options granting practices, which would presumably defeat a claim of disloyalty on the part of the board. The court likewise described a hypothetical scenario where a compensation committee determined that a spring loaded options grant was the most appropriate compensation for the person in question, and properly disclosed it. These situations served to further narrow the court’s holding.

The pleadings and the opinion for this case can be found on the DU Corporate Governance website.