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Spring-Loading Options

By Thomas J. Quigley and Steven S. Flores

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

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