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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.
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