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This seeming simplicity notwithstanding, CNET opposed the demand for inspection, the parties battled over discovery via a contentious motion to compel, and only on the brink of trial did CNET agree to share certain documents with plaintiffs. Plaintiffs, who are shareholders of CNET, initiated this action under 8 Del. § 220 to seek books and records relating to stock options backdating — a practice in which the company has already admitted it engaged — after being ordered to do so by a federal judge in California.Specifically, the parties disagree about whether plaintiffs may properly inspect books and records predating plaintiffs' ownership of stock. Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from: (1) The corporation's stock ledger, a list of its stockholders, and its other books and records. There is no shortage of proper purposes under Delaware law, but perhaps the most common "proper purpose" is the desire to investigate potential corporate mismanagement, wrongdoing, or waste.Merely stating that one has a proper purpose, however, is necessarily insufficient. Delaware courts have been harshly criticized for this requirement. Robert Brown's Inspection Rights under Delaware Law,
On June 19, 2006, plaintiffs filed their initial complaint in the District Court for the Northern District of California alleging federal securities and state law claims against CNET and its directors relating to backdated stock options. 20, 2007) ("demand will be excused if a majority of the board that allegedly pursued the ultra vires action remains on the defendant board at the time demand is made"). The district court analyzed individually the eight option grants that plaintiffs alleged were backdated and concluded that plaintiffs successfully pleaded particularized facts with respect to only the grants on June 3, 1998, April 17, 2000, and October 8, 2001.
That article and its findings have led to the filing of numerous federal and state law actions and to well over one hundred SEC investigations.
This case is somewhat unique, however, because here the defendant corporation has admitted that it engaged in backdating stock options granted from the time of its IPO in 1996 through at least 2003.
After CNET's disclosures in the fall, plaintiffs amended their derivative complaint, and the defendants moved to dismiss for failure to make a demand on the CNET board. Consequently, plaintiffs had demonstrated that only one member of the then-current board received back-dated options.
Applying the Aronson test for demand futility, the district court granted the motion to dismiss. Judge Alsup also found unpersuasive plaintiffs' attempts to show demand futility under the second prong of Aronson, concluding that plaintiffs failed to allege the particularized facts necessary to demonstrate that board members actually engaged in the process of backdating.