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Recent rulings have carved out a victorious first round for plaintiffs in civil litigation over stock-options backdating after judges refused to dismiss four of their suits. At issue in most of the cases was whether plaintiffs, as shareholders, should have demanded books and records from the companies’ boards of directors before filing their lawsuits. The defendants have argued that the suits should be dismissed if the plaintiffs fail to make such a demand. The plaintiffs have argued that a demand would have been futile, given that the directors either approved or received the allegedly backdated stock options. The rulings are the first substantive decisions to come out of the derivative cases in the backdating scandal. “Plaintiffs have been encouraged by the recent rulings,” said Megan McIntyre, a partner at Wilmington, Del.-based Grant & Eisenhofer, which defeated a motion to dismiss a suit filed by Tyson Foods Inc. last month. “At least on the merits, courts are finding these activities are not going to pass muster,” she said. Acts of bad faith To plead demand futility, the plaintiffs must show that a company’s directors are not objective or that their acts were not of sound “business judgment.” On Feb. 6, Chancellor William B. Chandler in Delaware issued the most notable rulings on this issue. In a case against Maxim Integrated Products Inc., Chandler said the plaintiffs provided the court with “empirical evidence” that backdating occurred. Ryan v. Gifford, C.A. No. 2213-N (Del. Ch.). “I am unable to fathom a situation where the deliberate violation of a shareholder approved stock option plan and false disclosures, obviously intended to mislead shareholders into thinking that the directors complied honestly with the shareholder-approved option plan, is anything but an act of bad faith,” he wrote. Lawyers for the plaintiffs and the defendants did not return calls seeking comment. In another case against Tyson, Chandler agreed that a demand would have been futile, particularly since many of the directors had not changed. He also called the alleged backdating a “fundamental, incontrovertible lie.” In re Tyson Foods Inc. Consolidated Shareholder Litigation, C.A. No. 1106-N (Del. Ch.). McIntyre said the rulings give plaintiffs in other cases a good chance of surviving motions to dismiss. Tyson’s lawyer, Kurt Heyman, a partner at Wilmington-based Proctor Heyman, did not return calls. Two other rulings Two other rulings followed the Delaware decisions. On March 8, a federal judge in Los Angeles refused to dismiss the backdating case against Broadcom Corp., noting that the “plaintiffs have pleaded sufficient facts” on demand futility. In Re Broadcom Corp. Derivative Litigation, No. 2:06-cv-03252 (C.D. Calif.). Richard Heimann, a partner at San Francisco’s Lieff Cabraser Heimann & Bernstein, which filed the Broadcom suit, said he relied on the two Delaware cases in his arguments. Broadcom’s lawyer, Daniel Lefler, a partner at Los Angeles-based Irell & Manella, declined to comment. In a case against UnitedHealth Group Inc., a federal judge in Minnesota refused to dismiss the case until a special litigation committee concluded its independent investigation of the allegations. In re: UnitedHealth Group Inc. Shareholder Derivative Litigation, No. 06-cv-1216 (D. Minn.)

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