On January 11, 2008, Judge Ronald Whyte of the U.S. District Court for the Northern District of California dismissed two shareholder derivative suits alleging stock options backdating, citing the plaintiffs’ failure to plead with particularity that demand on the company’s board of directors was excused.
Relying on the Delaware Court of Chancery’s opinion in Ryan v. Gifford, 918 A.2d 341 (Del. Ch. 2007),plaintiffs in In re Finisar Corp. Derivative Litigation, No. C-06-07660 RMW, 2008 WL 131867 (N.D. Cal. Jan. 11, 2008), alleged that certain directors had received backdated stock options such that they could not be considered disinterested for purposes of considering a demand on the board. Judge Whyte, however, distinguished Ryan on the grounds that, “[h]ere, unlike the allegations by the plaintiffs in Ryan, plaintiffs do not point to a series of stock options priced at the low of each month or relevant period[;] [r]ather, plaintiffs point to 12 option grants over a six year period . . .” for which the strike prices ranged from the monthly low up to, and including, the monthly high. Id. at *9. The court noted that such a pattern “could be consistent with randomly priced option grants.” Id. at *11. Moreover, whereas the plaintiffs in Ryan provided empirical evidence of backdating, the plaintiffs in the present case had failed to support their allegations with “any statistical analysis of the returns on the option grants compared to market returns . . . .” Id. at *10. Finally,the court observed that the company’s internal investigation did not indicate that any of the officers or directors of the company had received misdated grants, and, thus, any alleged delay in the filing of certain Form 4’s was, by itself, insignificant. Id. at *9, *12.
Judge Whyte also dismissed another backdating case — In re MIPS Technologies, Inc. Derivative Litigation, No. C-06-06699 RMW, 2008 WL 131915, at *6 (N.D. Cal. Jan. 11, 2008), concluding that demand futility had not been established. The court held, as an initial matter, that plaintiff lacked standing to bring derivative claims with respect to stock option practices that pre-dated his ownership of the stock. Id. The court also determined that the plaintiff had pled facts suggesting that only the CEO might have been interested for demand purposes, although the complaint lacked sufficient details to permit a conclusive determination. Id. at *10. With respect to the remaining six directors on the board, the court viewed plaintiff’s allegations as mere “boilerplate” and “totally insufficient” to excuse demand. In response to plaintiff’s recitation of the directors’ committee memberships, Judge Whyte cited a Delaware Court of Chancery opinion for the proposition that, while “[k]nowingly granting or approving stock options can render a director interested,  ‘mere membership’ of a committee is insufficient.” Id. at *8 (citing Desimone v. Barrows, 924 A.2d 908, 938 (Del. Ch. 2007)). Furthermore, plaintiff’s allegations that certain directors had received backdated stock options were directly contradicted by the facts in the record. Id. at *9.