In Desimone v. Barrows, Sycamore Networks, Inc., issued stock options to certain non-executive employees, certain officers, and the four outside directors. Desimone, a shareholder, brought a derivative suit to recover from the recipients and the two inside directors on the ground that the board breached its fiduciary duties. Vice Chancellor Strine dismissed the complaint on the grounds that plaintiff lacked standing to challenge some of the options because he was not a stockholder when some of the option grants were made, had not shown demand futility as to some claims, and did not state a claim upon which relief can be granted as to the remaining claims.
The pedagogical value of this opinion lies in Strine, VC’s discussion of the current options litigation and his discussion of the effect of Stone v. Ritter on Caremark claims. He quite lucidly describes backdating and distinguishes it from spring loading and bullet-dodging practices. But more importantly, he gives his view of Stone. I don’t read the Vice Chancellor as differing from my own interpretation of Stone (here) though he claims that my reading is not “entirely consistent” with Stone:
In this same vein, the importance and utility of the Delaware Supreme Court’s recent decision in Stone v. Ritter, reinforcing the vitality of this court’s decision in In re Caremark Int'l Inc. Deriv. Litig. should not be ignored. Some respected scholars seem to fear that Stone opens directors to new kinds of claims foreclosed by Caremark, while others read it as taking away a non-scienter based claim Caremark supposedly seemed to suggest. Neither position seems entirely consistent with the decision itself. Stone clarified one of the most difficult questions in corporate law — when directors with no motivation to injure the firm can be held responsible if the corporation incurs serious harm as a result of its failure to obey the law. What Stone makes clear is that Caremark and its progeny, such as Guttman v. Huang, are still good law. For reasons Caremark well-explained, to hold directors liable for a failure in monitoring, the directors have to have acted with a state of mind consistent with a conscious decision to breach their duty of care. Caremark itself encouraged directors to act with reasonable diligence, but plainly held that director liability for failure to monitor required a finding that the directors acted with the state of mind traditionally used to define the mindset of a disloyal director — bad faith — because their indolence was so persistent that it could not be ascribed to anything other than a knowing decision not to even try to make sure the corporation’s officers had developed and were implementing a prudent approach to ensuring law compliance. By reinforcing that a scienter-based standard applies to claims in the delicate monitoring context, Stone ensured that the protections that exculpatory charter provisions afford to independent directors against damage claims would not be eroded. Stone has obvious implications for cases like this, when a plaintiff seeks to hold directors accountable for failing to prevent backdating by corporate officers.
Professors teaching Desimone could do so at page 400 of the casebook at the end of section 4. Alternatively, one could summarize this case in the Notes and Questions following Stone, which is inserted at page 394. Both Stone and Desimone are included in the casebook Supplement.
Francis Pileggi has a characteristically good discussion of Desimone (here). Larry Ribstein also has a very good post on this case (here).
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