Ryan v. Gifford, Civil Action No. 2213-N.

CourtCourt of Chancery of Delaware
Writing for the CourtChandler
Citation918 A.2d 341
PartiesWalter E. RYAN, Jr., In the right of and for the benefit of Maxim Integrated Products, Inc., Plaintiff, v. John F. GIFFORD, James R. Bergman, B. Kipling Hagopian, A.R. Frank Wazzan, Eric P. Karros, M.D. Sampels, Defendants, and Maxim Integrated Products, Inc., Nominal Defendant.
Docket NumberCivil Action No. 2213-N.
Decision Date06 February 2007
918 A.2d 341
Walter E. RYAN, Jr., In the right of and for the benefit of Maxim Integrated Products, Inc., Plaintiff,
v.
John F. GIFFORD, James R. Bergman, B. Kipling Hagopian, A.R. Frank Wazzan, Eric P. Karros, M.D. Sampels, Defendants, and
Maxim Integrated Products, Inc., Nominal Defendant.
Civil Action No. 2213-N.
Court of Chancery of Delaware, New Castle County.
Submitted: January 29, 2007.
Decided: February 6, 2007.

[918 A.2d 345]

Norman M. Monhait, of Rosenthal Monhait & Goddess, P.A., Wilmington, Delaware; of Counsel: Krislov & Associates, Ltd., Chicago, Illinois, Attorneys for Plaintiff.

Peter J. Walsh Jr. and Timothy R. Dudderar, of Potter Anderson & Corroon LLP, Wilmington, Delaware; of Counsel: John M. Potter, of Quinn Emanuel Urquhart Oliver & Hedges LLP, San Francisco, California, Attorneys for Individual Defendants James R. Bergman, B. Kipling Hagopian, A.R. Frank Wazzan, Eric P. Karros, and M.D. Sampels.

Jeffrey L. Moyer and Kelly E. Farnan, of Richards Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Individual Defendant John F. Gifford.

J. Jackson Shrum, of Harvey Pennington, Ltd., Wilmington, Delaware; of Counsel: Michael J. Ioannou, of Ropers Majeski Kohn & Bentley, San Jose, California, Attorney for Nominal Defendant.

OPINION

CHANDLER, Chancellor.


On March 18, 2006, The Wall Street Journal sparked controversy throughout the investment community by publishing a one-page article, based on an academic's statistical analysis of option grants, which revealed an arguably questionable compensation practice. Commonly known as backdating, this practice involves a company issuing stock options to an executive on one date while providing fraudulent documentation asserting that the options were actually issued earlier. These options may provide a windfall for executives because the falsely dated stock option grants often coincide with market lows. Such timing reduces the strike prices and inflates the value of stock options, thereby increasing management compensation. This practice allegedly violates any stock option plan that requires strike prices to be no less than the fair market value on the date on which the option is granted by the board. Further, this practice runs afoul of many state and federal common and statutory laws that prohibit dissemination of false and misleading information.

After the article appeared in the Journal, Merrill Lynch issued a report demonstrating that officers of numerous companies, including Maxim Integrated

918 A.2d 346

Products, Inc., had benefited from so many fortuitously timed stock option grants that backdating seemed the only logical explanation. The report engendered this action.

Plaintiff Walter E. Ryan alleges that defendants breached their duties of due care and loyalty by approving or accepting backdated options that violated the clear letter of the shareholder-approved Stock Option Plan and Stock Incentive Plan ("option plans"). Individual defendants move to stay this action in favor of earlier filed federal actions in California ("federal actions"). In the alternative, they move to dismiss this action on its merits.

In this Opinion, I grant individual defendants' motion to dismiss all claims arising before April 11, 2001. I deny the remainder of the individual defendants' motion to stay or dismiss.

I. FACTS

Maxim Integrated Products, Inc. is a technology leader in design, development, and manufacture of linear and mixed-signal integrated circuits used in microprocessor-based electronic equipment. From 1998 to mid-2002 Maxim's board of directors and compensation committee granted stock options for the purchase of millions of shares of Maxim's common stock to John F. Gifford, founder, chairman of the board, and chief executive officer, pursuant to shareholder-approved stock option plans filed with the Securities and Exchange Commission. Under the terms of these plans, Maxim contracted and represented that the exercise price of all stock options granted would be no less than the fair market value of the company's common stock, measured by the publicly traded closing price for Maxim stock on the date of the grant. Additionally, the plan identified the board or a committee designated by the board as administrators of its terms.

Ryan is a shareholder of Maxim and has continuously held shares since his Dallas Semiconductor Incorporated shares were converted to Maxim shares upon Maxim's acquisition of Dallas Semiconductor on April 11, 2001. He filed this derivative action on June 2, 2006, against Gifford; James Bergman, B. Kipling Hagopian, and A.R. Frank Wazzan, members of the board and compensation committee at all relevant times; Eric Karros, member of the board from 2000 to 2002, and M.D. Sampels, member of the board from 2001-2002. Ryan alleges that nine specific grants were backdated between 1998 and 2002, as these grants seem too fortuitously timed to be explained as simple coincidence. All nine grants were dated on unusually low (if not the lowest) trading days of the years in question, or on days immediately before sharp increases in the market price of the company.

A. Genesis of these Claims

As practices surrounding the timing of options grants for public companies began facing increased scrutiny in early 2006, Merrill Lynch conducted an analysis of the timing of stock option grants from 1997 to 2002 for the semiconductor and semiconductor equipment companies that comprise the Philadelphia Semiconductor Index. Merrill Lynch measured the aggressiveness of timing of option grants by examining the extent to which stock price performance subsequent to options pricing events diverges from stock price performance over a longer period of time. "Specifically, it looked at annualized stock price returns for the twenty day period subsequent to options pricing in comparison to stock price returns for the calendar year in

918 A.2d 347

which the options were granted."1 In theory, companies should not generate systematic excess return in comparison to other investors as a result of the timing of options pricing events. "[I]f the timing of options grants is an arm's length process, and companies have [not] systematically taken advantage of their ability to backdate options within the [twenty] day windows that the law provided prior to the implementation of Sarbanes Oxley in 2002, there shouldn't be any difference between the two measures."2 Merrill Lynch failed to take a position on whether Maxim actually backdated; however, it noted that if backdating did not occur, management of Maxim was remarkably effective at timing options pricing events.

With regard to Maxim, Merrill Lynch found that the twenty-day return on option grants to management averaged 14% over the five-year period, an annualized return of 243%, or almost ten times higher than the 29% annualized market returns in the same period.

B. Similar Pending Actions

The Merrill Lynch report formed the bases for other derivative lawsuits. Robert McKinney filed a federal action in the Northern District of California on May 22, 2006, three weeks before this action was filed. Eugene Horkay, Jr. followed suit, filing an identical action in the same court two days later. The Northern District of California entered an order on June 14, 2006, consolidating these suits and all subsequently filed suits. Under this order, two more actions were consolidated. All four derivative plaintiffs have stipulated to consolidate and agreed to a lead plaintiff and lead counsel structure. Further, defendants and plaintiffs have entered into a stipulated scheduling order approved by that court.3

The federal action is similar to the Delaware action. The federal plaintiffs posit claims of backdating based on the Merrill Lynch report. They specifically challenge ten option grants, alleging that backdating occurred. Further, they contend that this violation of their options plan exposes Maxim to adverse tax consequences.

The federal action differs in some respects, however. First, that action alleges that other officers, in addition to Gifford, benefited from backdated options. Further, the federal action names more director defendants. In addition to breach of fiduciary duty claims, the federal plaintiffs assert claims for aiding and abetting breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud and corporate waste. The federal plaintiffs also allege violations of sections 10(b) and 14(a) of the Securities Exchange Act of 1934 and of Rules 10b-5 and 14a-9.

In addition to the Delaware action and the federal action, Louisiana Sheriff's Pension & Relief Fund filed a derivative action in California state court that makes similar allegations as the federal derivative action and this action. The California state court action, filed on June 16, 2006, names sixteen defendants, including all defendants in the Delaware action. The judge in the state court action granted a stay in that proceeding.

II. CONTENTIONS

Plaintiff contends that all defendants breached their fiduciary duties to Maxim and its shareholders. The shareholder-approved 1983 Stock Option Plan and 1999

918 A.2d 348

Stock Incentive Plan bound the board of directors to set the exercise price according to the terms of the plans. The 1999 plan allowed the board to designate a committee to approve the plans. The designated compensation committee, consisting of Bergman, Hagopian, and Wazzan, approved option grants after 1999. Plaintiff alleges that from 1998 to 2002, the board actively allowed Maxim to backdate at least nine option grants issued to Gifford, in violation of shareholder-approved plans, and to purposefully mislead shareholders regarding its actions. As a result of the active violations of the plan and the active deceit, plaintiff contends that Maxim received lower payments upon exercise of the options than would have been received had they not been backdated. Further, Maxim suffers adverse effects...

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    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
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    ...look to Delaware law for additional guidance on this question, Delaware law would not produce a different result. See Ryan v. Gifford , 918 A.2d 341, 357 (Del. Ch. 2007) ("Bad faith ... may be shown where ‘the fiduciary intentionally acts with a purpose other than that of advancing the best......
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    • United States District Courts. 11th Circuit. United States District Court of Middle District of Florida
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    ...by the facts alleged in the Complaint, gives rise to an inference of scienter.") (internal citation omitted); Ryan v. Gifford, 918 A.2d 341, 355 n. 35 (Del.Ch.2007) ("[A]ny grant of options had to have been approved by the committee, and that committee can be reasonably expected to know the......
  • In re Brocade Communications Systems, Inc., No. C 05-02233 CRB.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
    • January 6, 2009
    ...limitations to these claims. 10 Del.Code § 8106(a). Courts have applied that same period to equitable claims by analogy, Ryan v. Gifford, 918 A.2d 341, 359 (Del.Ch.2007), so the unjust enrichment claim is also governed by a three-year limitations period. The statute "begins to run at the ti......
  • In re Verisign, Inc., Derivative Litigation, No. C 06-4165 PJH.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
    • September 14, 2007
    ...100% allegiance to the corporation, since doing so may require that the board sue itself on behalf of the corporation.'" Ryan v. Gifford, 918 A.2d 341, 352 (Del.Ch.2007) (quoting Sanders v. Wang, 1999 WL 1044880, at *4 (Del.Ch., Nov. 8, 1999)). However, a plaintiff may not "bootstrap allega......
  • Request a trial to view additional results
200 cases
  • U.S. Small Bus. Admin. Funding Corp. v. Feinsod, No. 17-CV-3586 (JFB)(AYS)
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • October 1, 2018
    ...look to Delaware law for additional guidance on this question, Delaware law would not produce a different result. See Ryan v. Gifford , 918 A.2d 341, 357 (Del. Ch. 2007) ("Bad faith ... may be shown where ‘the fiduciary intentionally acts with a purpose other than that of advancing the......
  • Edward J. Goodman Life Income v. Jabil Circuit, Case No. 8:06-cv-01716-T-23EAJ.
    • United States
    • United States District Courts. 11th Circuit. United States District Court of Middle District of Florida
    • January 26, 2009
    ...by the facts alleged in the Complaint, gives rise to an inference of scienter.") (internal citation omitted); Ryan v. Gifford, 918 A.2d 341, 355 n. 35 (Del.Ch.2007) ("[A]ny grant of options had to have been approved by the committee, and that committee can be reasonably expected t......
  • In re Brocade Communications Systems, Inc., No. C 05-02233 CRB.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
    • January 6, 2009
    ...limitations to these claims. 10 Del.Code § 8106(a). Courts have applied that same period to equitable claims by analogy, Ryan v. Gifford, 918 A.2d 341, 359 (Del.Ch.2007), so the unjust enrichment claim is also governed by a three-year limitations period. The statute "begins to run at t......
  • In re Verisign, Inc., Derivative Litigation, No. C 06-4165 PJH.
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
    • September 14, 2007
    ...allegiance to the corporation, since doing so may require that the board sue itself on behalf of the corporation.'" Ryan v. Gifford, 918 A.2d 341, 352 (Del.Ch.2007) (quoting Sanders v. Wang, 1999 WL 1044880, at *4 (Del.Ch., Nov. 8, 1999)). However, a plaintiff may not "bootstrap a......
  • Request a trial to view additional results

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