Here Comes Delaware

Executives implicated in stock backdating scandals might have expected softer treatment in state courts than they got in federal courts. But Delaware is starting to close that gap.

Companies are getting a stern warning not to mess with their fiduciary trust, according to the Court of Chancery in Delaware, where many corporations are incorporated. In two recent rulings, Chancellor William Chandler took a tough stand against backdating and spring-loading options grant dates to take advantage of positive financial news right before it is made public.

Chandler refused to dismiss a lawsuit against California chipmaker Maxim Integrated Products. The Sunnyvale-based firm has been accused of breaching its fiduciary trust by accepting backdating schemes; the suit was filed by a shareholder who claimed that Maxim allowed options backdating over a period of several years, contravening shareholder-approved plans.

Chandler took a similar stance in a suit involving Tyson Foods, of Springdale, Ark. A suit filed by Amalgamated Bank of New York and a New Jersey resident alleges that company officials took advantage of upcoming good news to grant options just before a spike in its stock price. Chandler refused to dismiss allegations that the Tyson board’s compensation committee violated their fiduciary duty to shareholders.

The chancellor’s intransigence “means that the Delaware courts are interested in backdating,” says Jill Fisch, a law professor at Fordham University School of Law who is spending a semester teaching at the University of Pennsylvania’s School of Law. In the past, an executive accused of securities fraud typically did better if the case was litigated under state law, Fisch says. Now, Delaware’s Court of Chancery seems to be trying to cut off that avenue of escape.