The Court also found that directors who joined the Board or Compensation Committee after the alleged backdating occurred were disinterested and could independently evaluate the Company's option backdating claims.The Court also noted that once CNET's option problems came to light, the Board appointed a Special Committee to investigate and apply remedial measures.Options backdating involves falsifying incentive option grant dates in order to increase the value of the options to executives.The manipulation of grant dates leaves a measurable statistical fingerprint, which we used to estimate the likelihood of backdating among not only companies sued for the practice, but across a sample of thousands of firms that used option compensation.It is also noteworthy that the Court distinguished the Delaware Chancery Court's recent opinion in Kevin P.Muck, Partner, Litigation Group [email protected], 415.875.2384 Felix S.based on allegations of options "backdating." , No. In rejecting plaintiffs' arguments, the Court began by scrutinizing their use of price movements surrounding the option grants to prove their claims of backdating, and noted their "fail[ure] to plead where their method came from, whether it was used by anyone else, or whether it was peer-reviewed or bore other indicia of academic approval." Accordingly, the Court held that without establishing that their allegations were based on "sound analytical methods," an inference of fraud was "more difficult to support." Relying heavily on guidance provided by the SEC's Chief Accountant on September 19, 2006, the Court also explained that there are a number of non-fraudulent explanations as to how a Company could use the wrong measurement date for an option grant.
In particular, the Court did not find an inference of backdating where: The Court ultimately found that plaintiffs adequately alleged that three grants were backdated. After carefully analyzing the specific grants at issue and allegations relating to individual directors, the Court held that plaintiffs failed to establish that a majority of CNET's board faced a substantial likelihood of personal liability or was otherwise incapable of exercising independent business judgment.Consequently, the mere conclusion that an option bore an incorrect measurement date or any resultant restatement of financial statements would be insufficient by itself to demonstrate wrongdoing.This ultimately resulted in a re-pricing of some options and a restatement of the Company's financials, but the Committee did not find any intentional wrongdoing.In light of this fact, the Court would not infer that fraud occurred "absent other facts" to the contrary.
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Lee, Associate, Litigation Group [email protected], 650.335.7123 Eric Ball, Associate, Litigation Group [email protected], 650.335.7635 ©2007 Fenwick & West LLP. This update is intended by Fenwick & West LLP to summarize recent developments in the law.