Spring-Loading Options

Delaware courts are beginning to analyze claims concerning the controversial practice of spring-loading options. Spring-loading is the granting of options just prior to the release of favorable company information (in the company's possession at the time of the grant). The options are granted at a market price on the day of the grant. They are said to be 'spring-loaded' because upon release of the favorable news, the stock price is expected to rise and the options would then become 'in-the-money.' While the practice has long been the subject of academic debate and regulatory scrutiny, the judiciary has largely remained silent on the substance of this matter. Three recent opinions of the Delaware Chancery court are significant because they confirm that spring-loading may give rise to a breach of fiduciary duty claim, and they reveal the analytical framework that the Chancery court ' and other courts ' will likely use when deciding future claims. These early signals from the bench should be heeded by both practitioners and in-house counsel to corporations considering changes to equity-based executive compensation plans.

The Chancery Court Weighs-In

By most accounts, options manipulation began in the late 1990s. The use of options manipulation increased when technology and 'dot.com' companies had little cash, but substantial potential for future value. Published reports estimate that over 100 companies are (or have been) under investigation for various forms of options manipulation, including spring-loading. Academics have vigorously debated whether spring-loading could be shoehorned into a claim for insider trading (on the theory that the directors granting the options possess material, non-public information at the time of the grant), or whether spring-loading constitutes a breach of fiduciary duty to shareholders because the practice is deceptive. Others, such as Commissioner Paul Atkins of the U.S. Securities & Exchange Commission ('SEC'), have suggested that there may be a legitimate business purpose for boards to spring-load. See, e.g., Paul S. Atkins: Remarks Before The International Corporate Governance Network on SEC.gov, http://www.sec.gov/ news/ speech/2006/spch070606psa.htmnews/speech/2006/spch070606psa.htm  (last viewed on April 14, 2008) ('In approving the grant, the directors may determine that they can grant fewer options to get the same economic effect because they anticipate that the share price will rise. Who are we to second-guess that decision?'). Until recently, the judiciary has largely declined to weigh-in on this debate.

In In Re Tyson Foods, Inc. Consol. S'holder Litig., 919 A.2d 563 (Del. Ch. Feb. 6, 2007) ('Tyson I'), the Chancery court provided its first substantive analysis of a spring-loading claim. The derivative plaintiffs in Tyson alleged, among other things, that certain directors violated their fiduciary duty of loyalty by granting options to executives when the directors knew, but the public did not know, that Tyson was about to disclose positive and material information. Id. at 575-76 (describing grants). The complaint cited several examples where the directors made large option grants to insiders just before the release of favorable news, and the share price increased shortly after release of the news. Id. Various outside directors moved to dismiss this claim.

As an initial matter, the court determined that, at least for the purposes of the current motion, the statute of limitations should be tolled. Id. at 590-91. Specifically, the court stated that the doctrines of equitable tolling and fraudulent concealment could apply to cases where defendants knowingly spring-loaded options while maintaining that such options were issued at market rates. Id. Substantively, the court declined to consider whether spring-loading constituted a form of insider trading. Id. at 593. Rather, the question was whether spring-loading could be within the bounds of 'business judgment' in the face of a shareholder approved plan explicitly requiring a market value strike-price for option grants. Id. Of course, 'business judgment' refers to the basic precept that business affairs of a corporation are to be managed under the direction of its board of directors. To encourage the full exercise of managerial authority, Delaware law protects directors with the 'business judgment rule.' This rule is a presumption that, in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the company's best interests. A showing that the board breached a fiduciary duty, however, may rebut this presumption. Ryan v. Gifford, 918 A.2d 341, 356 (Del. Ch. Feb. 6, 2007).

Elements That Must Be Pled

Chancellor Chandler stated that a fiduciary who authorized option grants while knowing that the underlying shares were worth more than the market price might be deemed to have acted in bad faith. See Tyson I, 919 A.2d at 593. Set against this backdrop, the court articulated the elements that must be pled to show that spring-loaded options issued by a disinterested and independent board are beyond the bounds of business judgment:

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: 1) 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.

Id. at 593. ('Bullet-dodging' is essentially the opposite of spring-loading. With 'bullet-dodging,' the grant occurs just after release of bad news that lowers the price of the grant).

The allegations in the complaint were assumed true for the purposes of the motion to dismiss before the court. While Chancellor Chandler opined that a director might be able to show that shareholders expressly empowered the board of directors (or relevant committee) to use spring-loading, no such assertion was before the court. Id. at 593. The court seemed swayed by the fact that the fair-market-value restriction in the plan had been pitched as a way to provide incentives for future performance, not as a reward for past performance. The court suggested that the spring-loaded grants may have breached an implied term of the plan, and Chancellor Chandler refused to dismiss the claim. See id.

Desimone v. Barrows

In Desimone v. Barrows, 924 A.2d 908 (Del. Ch. June 7, 2007) ('Desimone'), Vice Chancellor Strine granted defendants' motion to dismiss, among other things, a breach of fiduciary duty claim based on spring-loading. Substantively, the opinion in Desimone largely turned on the plaintiff's lack of standing. Id. at 913-14, 927. Nonetheless, in the 'interests of efficiency' (Id. at 927), Vice Chancellor Strine further elucidated the factors that a court may examine when deciding whether to dismiss a breach of fiduciary duty claim based on allegations of spring-loading.

The case concerned so-called 'employee grants,' 'officer grants,' and 'outside director grants.' The court examined whether corporate officials breach their fiduciary duties when they: 1) have permission under an approved option plan to grant below-market options; 2) represented to the markets that they are granting fair-market-value options; but 3) allegedly spring-load options. Id. at 931. The court noted the obvious: board members do not have the authority to turn the corporation into 'a rouge' by causing the corporation to break the law. Id. at 934. As pled, however, the court found that the breach of fiduciary duty claim based on spring-loading could not survive. Id. at 946, 951. In dismissing the claim, the court relied on several factors, including:

• The allegedly spring-loaded officer grants at issue occurred on one day (in stark contrast to the multi-year pattern alleged in Tyson) (Id. at 916, 943);
• Those grants occurred a full 16 days in advance of the 'positive' announcement alleged by the derivative plaintiff (Id. at 916, 943);
• The announcement was 'non-seismic' because it did not lead to a sharp increase in the share price (the stock actually went down initially) (Id. at 916, 946);
• Grants were subject to a three-year vesting schedule and heavily restricted (Id. at 945-46);
• Outside director grants (attacked because of alleged bullet-dodging) were made on a regularly scheduled day planned well in advance (Id. at 917); and
• Two officers who sit on the board (the CEO and Chairman) owned a combined 32% of the company ' but they did not receive any of the disputed options. Id. at 916-17.

Most recently, in In Re Tyson Foods, Inc. Consol. S'holder Litig., No. Civ. A. 1106-CC, 2007 WL 2351071 (Del. Ch., Aug. 15, 2007) ('Tyson II'), Chancellor Chandler was faced with another attempt by the outside director defendants to dismiss the spring-loading count from the suit. Chancellor Chandler noted that his earlier decision was incorrectly based on the assumption that the plan at issue required 'at market' pricing of the grants. Id. at *2. It did not. Id. at *3. The plan allowed the compensation committee latitude to price the grants.

Although this opinion can partially be viewed as a clarification of the court's opinion in Tyson I, the Tyson II opinion concerned a Motion for Judgment on the Pleadings under Chancery Court Rule 12(c). Under Rule 12(c), the court must take all well-pled facts alleged in the complaint as admitted and to view the allegations and reasonable inferences that can be drawn from the allegations in a light most favorable to the non-movant. Id. at *2. A Rule 12(c) motion may be granted, however, when no material issue of fact exists and the movant is entitled to judgment as a matter of law. See Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993).

Essentially, defendants argued the company's SEC disclosures were adequate because they revealed the stated strike price to be the 'market price' on the date of the grant. See Tyson II, 2007 WL 2351071 at *4. Further, the compensation committee had the latitude to price the options below market. Id. Because SEC disclosures correctly revealed the market price and date of the grant, and the committee followed the plan, the defendants argued that the court should not infer a breach of the duty of loyalty and should dismiss the claim. Id. In rejecting defendants' argument the court stated:

The Defendants' argument suggests a relationship between director and shareholder that falls beneath any reasonable conception of the fiduciary and into the merely contractual. '

When directors seek shareholder consent to a stock incentive plan, or any other quasi-contractual arrangement, they do not do so in the manner of a devil in a dime-store novel, hoping to set a trap with a particular pattern of words. Had the 2000 Tyson Stock Incentive Plan never been put to a shareholder vote, the nature of a spring-loading scheme would constitute material information that the Tyson board of directors was obligated to disclose to investors when they revealed the grant. By agreeing to the Plan, shareholders did not implicitly forfeit their right to the same degree of candor from their fiduciaries. Id. at *4.

The court also noted that when fiduciaries intentionally conceal the nature of their earlier actions, it is reasonable for a court to infer that the act concealed was itself one of disloyalty outside the scope of business judgment. Id. The court found that the test articulated in Tyson I was 'too narrow,' and stated:

I am not convinced that allegations of an implicit violation of a shareholder-approved stock incentive plan is 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. Id. at *5.

Finally, the court held that when it comes to speaking out about company director or manager compensation, 'shareholders have a right to the full, unvarnished truth.' Id. at *4 n.18. For Chancellor Chandler, the opaque disclosures about the grants made by Tyson fell short of 'the full, unvarnished truth' and he refused to dismiss the spring-loading claim for a second time. Id. at *6.

What Do the Cases Instruct?

While there may be robust academic debate about whether or not spring-loading constitutes insider trading, what matters, at least to the Delaware courts, is whether spring-loading can give rise to a claim for a breach of fiduciary duty. It can.

When read together, the opinions reveal numerous factors that were influential to Chancellor Chandler and Vice Chancellor Strine when they determined the fate of the spring-loading claims at issue. While relevant information will always depend on the procedural posture of the case, and the specific allegations (and material) before the court, when evaluating a spring-loading issue, the following factors are worthy of careful evaluation:

• The terms of the relevant plan;
• The timing of the grants;
• Who received the grants;
• The stated reason for the grants;
• Whether the director (or committee) defendants are 'interested;'
• Whether were grants were restricted;
• The number of questionable grants at issue;
• The size of the grants at issue;
• Whether the date of the grant was regularly scheduled in advance;
• Whether the news released shortly after the grant actually made the share price increase (more than overall market movements); and
• Disclosures made in connection with the grants.

Just the Beginning

Tyson and Desimone illustrate that spring-loading claims will likely turn on whether the allegations before the court paint a picture of intentional deception. This 'picture' will be comprised of, among other things, the well-pled facts surrounding the grants, the plan terms, and disclosures. Tolling of the statute of limitations is possible under the doctrines of equitable tolling and fraudulent concealment. Allegations of an implied breach of an 'at-market' pricing restriction are not absolutely necessary for a court to find that spring-loading is outside the bounds of business judgment.

Nevertheless, there is plenty of room for clarification in the wake of Tyson and Desimone. For instance, all three of the opinions make one point absolutely clear about options grants: more disclosure is a safer approach than less disclosure. While this generality falls short of producing precise guidance to corporate boards, compensation committees, or in-house counsel, it is an overarching principle that should be followed if spring-loading is ever considered. Some dicta suggests that spring-loading could be proper if disclosed to, and permitted by, shareholders. Does this mean the potential solution to spring-loading liability is to revise plan terms to imbue fiduciaries with even more authority? Perhaps. Draftsmen, however, should be careful here because anything short of the 'full, unvarnished truth' may pose a risk under existing law.

At this stage, it is premature to interpret the court's approach to spring-loading as favoring either plaintiffs or defendants. Claims will ultimately turn on particulars. Moreover, courts will develop differing opinions about how many, or what kinds of, well-pled facts are sufficient to create an inference of intentional deception and they will struggle to define a shareholder's entitlement to 'unvarnished truth.' Until future cases further delineate the contours of this developing area of the law, however, the safest approach is for corporate boards to carefully review relevant equity-award practices to determine whether any problems can be identified, and to keep policies and practices current with this rapidly changing landscape.

Thomas J. Quigley is a partner in the New York office of Winston & Strawn LLP and chair of the firm's New York litigation department. He has more than 24 years of experience in commercial and financial litigation and the defense of product liability and fraud actions. Steven S. Flores is an associate in the same office

Delaware courts are beginning to analyze claims concerning the controversial practice of spring-loading options. Spring-loading is the granting of options just prior to the release of favorable company information (in the company's possession at the time of the grant). The options are granted at a market price on the day of the grant. They are said to be 'spring-loaded' because upon release of the favorable news, the stock price is expected to rise and the options would then become 'in-the-money.' While the practice has long been the subject of academic debate and regulatory scrutiny, the judiciary has largely remained silent on the substance of this matter. Three recent opinions of the Delaware Chancery court are significant because they confirm that spring-loading may give rise to a breach of fiduciary duty claim, and they reveal the analytical framework that the Chancery court ' and other courts ' will likely use when deciding future claims. These early signals from the bench should be heeded by both practitioners and in-house counsel to corporations considering changes to equity-based executive compensation plans.

The Chancery Court Weighs-In

By most accounts, options manipulation began in the late 1990s. The use of options manipulation increased when technology and 'dot.com' companies had little cash, but substantial potential for future value. Published reports estimate that over 100 companies are (or have been) under investigation for various forms of options manipulation, including spring-loading. Academics have vigorously debated whether spring-loading could be shoehorned into a claim for insider trading (on the theory that the directors granting the options possess material, non-public information at the time of the grant), or whether spring-loading constitutes a breach of fiduciary duty to shareholders because the practice is deceptive. Others, such as Commissioner Paul Atkins of the U.S. Securities & Exchange Commission ('SEC'), have suggested that there may be a legitimate business purpose for boards to spring-load. See, e.g., Paul S. Atkins: Remarks Before The International Corporate Governance Network on SEC.gov, http://www.sec.gov/ news/ speech/2006/spch070606psa.htmnews/speech/2006/spch070606psa.htm  (last viewed on April 14, 2008) ('In approving the grant, the directors may determine that they can grant fewer options to get the same economic effect because they anticipate that the share price will rise. Who are we to second-guess that decision?'). Until recently, the judiciary has largely declined to weigh-in on this debate.

In In Re Tyson Foods, Inc. Consol. S'holder Litig., 919 A.2d 563 (Del. Ch. Feb. 6, 2007) ('Tyson I'), the Chancery court provided its first substantive analysis of a spring-loading claim. The derivative plaintiffs in Tyson alleged, among other things, that certain directors violated their fiduciary duty of loyalty by granting options to executives when the directors knew, but the public did not know, that Tyson was about to disclose positive and material information. Id. at 575-76 (describing grants). The complaint cited several examples where the directors made large option grants to insiders just before the release of favorable news, and the share price increased shortly after release of the news. Id. Various outside directors moved to dismiss this claim.

As an initial matter, the court determined that, at least for the purposes of the current motion, the statute of limitations should be tolled. Id. at 590-91. Specifically, the court stated that the doctrines of equitable tolling and fraudulent concealment could apply to cases where defendants knowingly spring-loaded options while maintaining that such options were issued at market rates. Id. Substantively, the court declined to consider whether spring-loading constituted a form of insider trading. Id. at 593. Rather, the question was whether spring-loading could be within the bounds of 'business judgment' in the face of a shareholder approved plan explicitly requiring a market value strike-price for option grants. Id. Of course, 'business judgment' refers to the basic precept that business affairs of a corporation are to be managed under the direction of its board of directors. To encourage the full exercise of managerial authority, Delaware law protects directors with the 'business judgment rule.' This rule is a presumption that, in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the company's best interests. A showing that the board breached a fiduciary duty, however, may rebut this presumption. Ryan v. Gifford , 918 A.2d 341, 356 (Del. Ch. Feb. 6, 2007).

Elements That Must Be Pled

Chancellor Chandler stated that a fiduciary who authorized option grants while knowing that the underlying shares were worth more than the market price might be deemed to have acted in bad faith. See Tyson I, 919 A.2d at 593. Set against this backdrop, the court articulated the elements that must be pled to show that spring-loaded options issued by a disinterested and independent board are beyond the bounds of business judgment:

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: 1) 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.

Id. at 593. ('Bullet-dodging' is essentially the opposite of spring-loading. With 'bullet-dodging,' the grant occurs just after release of bad news that lowers the price of the grant).

The allegations in the complaint were assumed true for the purposes of the motion to dismiss before the court. While Chancellor Chandler opined that a director might be able to show that shareholders expressly empowered the board of directors (or relevant committee) to use spring-loading, no such assertion was before the court. Id. at 593. The court seemed swayed by the fact that the fair-market-value restriction in the plan had been pitched as a way to provide incentives for future performance, not as a reward for past performance. The court suggested that the spring-loaded grants may have breached an implied term of the plan, and Chancellor Chandler refused to dismiss the claim. See id.

Desimone v. Barrows

In Desimone v. Barrows , 924 A.2d 908 (Del. Ch. June 7, 2007) ('Desimone'), Vice Chancellor Strine granted defendants' motion to dismiss, among other things, a breach of fiduciary duty claim based on spring-loading. Substantively, the opinion in Desimone largely turned on the plaintiff's lack of standing. Id. at 913-14, 927. Nonetheless, in the 'interests of efficiency' (Id. at 927), Vice Chancellor Strine further elucidated the factors that a court may examine when deciding whether to dismiss a breach of fiduciary duty claim based on allegations of spring-loading.

The case concerned so-called 'employee grants,' 'officer grants,' and 'outside director grants.' The court examined whether corporate officials breach their fiduciary duties when they: 1) have permission under an approved option plan to grant below-market options; 2) represented to the markets that they are granting fair-market-value options; but 3) allegedly spring-load options. Id. at 931. The court noted the obvious: board members do not have the authority to turn the corporation into 'a rouge' by causing the corporation to break the law. Id. at 934. As pled, however, the court found that the breach of fiduciary duty claim based on spring-loading could not survive. Id. at 946, 951. In dismissing the claim, the court relied on several factors, including:

• The allegedly spring-loaded officer grants at issue occurred on one day (in stark contrast to the multi-year pattern alleged in Tyson) (Id. at 916, 943);
• Those grants occurred a full 16 days in advance of the 'positive' announcement alleged by the derivative plaintiff (Id. at 916, 943);
• The announcement was 'non-seismic' because it did not lead to a sharp increase in the share price (the stock actually went down initially) (Id. at 916, 946);
• Grants were subject to a three-year vesting schedule and heavily restricted (Id. at 945-46);
• Outside director grants (attacked because of alleged bullet-dodging) were made on a regularly scheduled day planned well in advance (Id. at 917); and
• Two officers who sit on the board (the CEO and Chairman) owned a combined 32% of the company ' but they did not receive any of the disputed options. Id. at 916-17.

Most recently, in In Re Tyson Foods, Inc. Consol. S'holder Litig., No. Civ. A. 1106-CC, 2007 WL 2351071 (Del. Ch., Aug. 15, 2007) ('Tyson II'), Chancellor Chandler was faced with another attempt by the outside director defendants to dismiss the spring-loading count from the suit. Chancellor Chandler noted that his earlier decision was incorrectly based on the assumption that the plan at issue required 'at market' pricing of the grants. Id. at *2. It did not. Id. at *3. The plan allowed the compensation committee latitude to price the grants.

Although this opinion can partially be viewed as a clarification of the court's opinion in Tyson I, the Tyson II opinion concerned a Motion for Judgment on the Pleadings under Chancery Court Rule 12(c). Under Rule 12(c), the court must take all well-pled facts alleged in the complaint as admitted and to view the allegations and reasonable inferences that can be drawn from the allegations in a light most favorable to the non-movant. Id. at *2. A Rule 12(c) motion may be granted, however, when no material issue of fact exists and the movant is entitled to judgment as a matter of law. See Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P. , 624 A.2d 1199, 1205 (Del. 1993).

Essentially, defendants argued the company's SEC disclosures were adequate because they revealed the stated strike price to be the 'market price' on the date of the grant. See Tyson II, 2007 WL 2351071 at *4. Further, the compensation committee had the latitude to price the options below market. Id. Because SEC disclosures correctly revealed the market price and date of the grant, and the committee followed the plan, the defendants argued that the court should not infer a breach of the duty of loyalty and should dismiss the claim. Id. In rejecting defendants' argument the court stated:

The Defendants' argument suggests a relationship between director and shareholder that falls beneath any reasonable conception of the fiduciary and into the merely contractual. '

When directors seek shareholder consent to a stock incentive plan, or any other quasi-contractual arrangement, they do not do so in the manner of a devil in a dime-store novel, hoping to set a trap with a particular pattern of words. Had the 2000 Tyson Stock Incentive Plan never been put to a shareholder vote, the nature of a spring-loading scheme would constitute material information that the Tyson board of directors was obligated to disclose to investors when they revealed the grant. By agreeing to the Plan, shareholders did not implicitly forfeit their right to the same degree of candor from their fiduciaries. Id. at *4.

The court also noted that when fiduciaries intentionally conceal the nature of their earlier actions, it is reasonable for a court to infer that the act concealed was itself one of disloyalty outside the scope of business judgment. Id. The court found that the test articulated in Tyson I was 'too narrow,' and stated:

I am not convinced that allegations of an implicit violation of a shareholder-approved stock incentive plan is 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. Id. at *5.

Finally, the court held that when it comes to speaking out about company director or manager compensation, 'shareholders have a right to the full, unvarnished truth.' Id. at *4 n.18. For Chancellor Chandler, the opaque disclosures about the grants made by Tyson fell short of 'the full, unvarnished truth' and he refused to dismiss the spring-loading claim for a second time. Id. at *6.

What Do the Cases Instruct?

While there may be robust academic debate about whether or not spring-loading constitutes insider trading, what matters, at least to the Delaware courts, is whether spring-loading can give rise to a claim for a breach of fiduciary duty. It can.

When read together, the opinions reveal numerous factors that were influential to Chancellor Chandler and Vice Chancellor Strine when they determined the fate of the spring-loading claims at issue. While relevant information will always depend on the procedural posture of the case, and the specific allegations (and material) before the court, when evaluating a spring-loading issue, the following factors are worthy of careful evaluation:

• The terms of the relevant plan;
• The timing of the grants;
• Who received the grants;
• The stated reason for the grants;
• Whether the director (or committee) defendants are 'interested;'
• Whether were grants were restricted;
• The number of questionable grants at issue;
• The size of the grants at issue;
• Whether the date of the grant was regularly scheduled in advance;
• Whether the news released shortly after the grant actually made the share price increase (more than overall market movements); and
• Disclosures made in connection with the grants.

Just the Beginning

Tyson and Desimone illustrate that spring-loading claims will likely turn on whether the allegations before the court paint a picture of intentional deception. This 'picture' will be comprised of, among other things, the well-pled facts surrounding the grants, the plan terms, and disclosures. Tolling of the statute of limitations is possible under the doctrines of equitable tolling and fraudulent concealment. Allegations of an implied breach of an 'at-market' pricing restriction are not absolutely necessary for a court to find that spring-loading is outside the bounds of business judgment.

Nevertheless, there is plenty of room for clarification in the wake of Tyson and Desimone. For instance, all three of the opinions make one point absolutely clear about options grants: more disclosure is a safer approach than less disclosure. While this generality falls short of producing precise guidance to corporate boards, compensation committees, or in-house counsel, it is an overarching principle that should be followed if spring-loading is ever considered. Some dicta suggests that spring-loading could be proper if disclosed to, and permitted by, shareholders. Does this mean the potential solution to spring-loading liability is to revise plan terms to imbue fiduciaries with even more authority? Perhaps. Draftsmen, however, should be careful here because anything short of the 'full, unvarnished truth' may pose a risk under existing law.

At this stage, it is premature to interpret the court's approach to spring-loading as favoring either plaintiffs or defendants. Claims will ultimately turn on particulars. Moreover, courts will develop differing opinions about how many, or what kinds of, well-pled facts are sufficient to create an inference of intentional deception and they will struggle to define a shareholder's entitlement to 'unvarnished truth.' Until future cases further delineate the contours of this developing area of the law, however, the safest approach is for corporate boards to carefully review relevant equity-award practices to determine whether any problems can be identified, and to keep policies and practices current with this rapidly changing landscape.

Thomas J. Quigley is a partner in the New York office of Winston & Strawn LLP and chair of the firm's New York litigation department. He has more than 24 years of experience in commercial and financial litigation and the defense of product liability and fraud actions. Steven S. Flores is an associate in the same office