Option Backdating and Disney

Bill Sjostrom —  9 June 2006

As I’m sure you’ve heard by now, the Delaware Supreme Court finally issued its opinion in Disney. See this post at the glom for commentary by Gordon Smith and a collection of links to discussion on other blogs. As for option backdating, I think directors on compensation committees of companies embroiled in the backdating scandal (or perhaps more accurately, D&O insurers) can breathe a sigh of relief following Disney, at least with respect to personal liability under state corporate law. The reason I say this is I suspect there is a strong argument that many of these directors breached the duty of care by failing to be properly informed when approving the issuance of backdated options. Specifically, my guess is that there is evidence out there that directors signed-off on written consents with grant dates left blank, approved minutes with altered grant dates, or ratified grants with no inquiry as to whether the grant dates were accurate. I’m not saying the directors knew of the backdating but that they were not properly informed/grossly negligent in approving the grants (it’s a different story if they knew). Prior to Disney there may have been concern that this sort of gross negligence arguably constituted a failure to act in good faith allowing a plaintiff to get around a 102(b)(7) exculpation provision. Disney, however, equates failure to act in good faith with bad faith and makes it clear that gross negligence does not constitute bad faith (see here).