Stock Award Challenges - By Shareholders

2014.Dec.29  Rescission of Stock Award to End Litigation (Annual Limit Exceeded).  AMD's SEC Form 8-K describes rescission of an incoming CEO's stock plan awards, due to the annual per person limit set forth in the underlying stock plan. This is another example of a "gotcha" claim because the company stands by its award decision, explaining in its 8-K that --

  • In voiding and rescinding the equity awards described above, the full Board also determined that the total compensation package provided for in Dr. Su’s employment agreement, including the equity compensation, was appropriate and aligned with stockholders’ interests. Having reaffirmed that the compensation it had promised to Dr. Su was appropriate and reasonable, the full Board determined that the Company intends to return Dr. Su’s equity compensation to the level it should have been prior to the action to void and rescind the equity awards described above at or near the earliest practicable opportunity available to the Company, subject to law and the terms of the 2004 Plan.

2014.Nov.13  Another Stock Award Scandal?  About a decade ago, a stock option scandal arose from academic studies showing that the grants had to have been backdated because the exercise prices were timed to market lows (in order to maximize upside gain for the recipients).  A new academic study concludes “that CEOs strategically time corporate news releases to coincide with months in which their equity vests.”  Titled “Strategic News Releases in Equity Vesting Months,” professors from the London Business School, the London School of Economics, and the National University of Singapore’s Business School cite the following evidence:

  • “CEOs reallocate news into vesting months, and away from prior and subsequent months. They release 5% more discretionary news in vesting months than prior months, but there is no difference for non-discretionary news.”

There is reason to expect the SEC to pursue enforcement efforts. On the one hand, the SEC has recently announced successful enforcement actions that arose from the use of “quantitative analytics” to identify individuals and companies with “especially high rates of [8-K] filing deficiencies.”  On the other hand, market practices tied to executive enrichment can be expected to attract SEC and public attention. 
Public companies will be smart to consider their exposure because the next executive compensation scandal to reach headlines could involve the selective use of corporate news releases to increase stock prices in months when executives are cashing-out their stock awards. Developments such as these are often just right for inclusion in an annual (or more frequent) briefing for compensation committees about executive compensation litigation.

2012.Aug.7  Statute of Limitations Bars SEC Penalties.  In SEC v. Bartek, the 5th Circuit addressed an SEC complaint in which "The sought-after relief included: permanent injunctions, civil penalties, and officer / director bars (“O/D bars”). All forms of relief were found to be penalties under §2462, and thus subject to its time limitations." 

2011.Dec.28  Impact of Backdating Scandal on Director Reputations and Re-election.  See Reputation Penalties for Poor Monitoring of Executive Pay: Evidence from Option Backdating, which finds generally that "at firms involved in BD, significant penalties accrued to compensation committee members (particularly those who served during the BD period) both in terms of votes withheld when up for election, and in terms of turnover, especially in more severe cases of BD. However, directors of BD firms did not suffer similar penalties at non-BD firms, raising the question of whether reputation penalties for poor oversight of executive pay are large enough to affect the ex ante incentives of directors."

2011.July.19   Comp. Comm. Member Avoids Liability in SEC Civil Suit relating to Backdated Stock Options (11th Cir.). Observing that the backdating at issue occurred before the practice "took on the universal look of inherent evil" (around 2002), the 11th Circuit dismissed the SEC's claims based on "unlawful undisclosed backdating of options."  Read more of the 11th Cir. Opinion.

2011.April.26  The Ninth Circuit has reinstated a shareholder derivative suit (Lynch v. Rawls, 9th Cir., No. 09-17379) alleging improper stock option backdating practices at Finisar Corp. (FNSR). Applying Delaware law, the court held that --

  • The plaintiffs had pleaded with sufficient particularity to survive a motion to dismiss for failure to make a presuit demand, notably by alleging “specific grants, specific language in option plans, specific public disclosures, and supporting empirical analysis to allege knowing and purposeful violations of stockholder plans and intentionally fraudulent public disclosures”; and 
  • the plaintiff's allegations established grounds on which to question the disinterestedness of most or all of the board members, and consequently (citing Brehm, 746 A.2d at 255) on which to find that the business judgment might not protect them.

2007  Ryan v. Gifford and Maxim Integrated Products (Del. Ch. 2007).

  • "Based on the allegations of the complaint, and all reasonable inferences drawn therefrom, I am convinced that the intentional violation of a shareholder approved stock option plan, coupled with fraudulent disclosures regarding the directors’ purported compliance with that plan, constitute conduct that is disloyal to the corporation and is therefore an act in bad faith. Plaintiffs allege the following conduct: Maxim’s directors affirmatively represented to Maxim’s shareholders that the exercise price of any option grant would be no less than 100% of the fair value of the shares, measured by the market price of the shares on the date the option is granted."