Desimone v. Barrows

Delaware Court of Chancery · 2007 · Corporations

924 A.2d 908 (2007)

Updated August 22, 2026

CorporationsDerivative suitsDemand excusalContemporaneous ownershipStock options backdating8 Del. C. § 327Rule 23.1Rales

Facts

Desimone had owned Sycamore stock only since February 4, 2002, but most of the challenged option grants occurred in 2000 and 2001. Sycamore later disclosed that certain employee-related option grants had been improperly accounted for and restated earnings for fiscal years 2000 through 2003 after an internal investigation prompted by an internal memo suggesting manipulation of grant dates for several employees. The complaint challenged three categories of grants: employee grants, officer grants, and outside director grants. The employee and officer grants were made under an Incentive Plan that permitted delegation to executive officers and did not require all grants to be at fair market value, while the outside director grants were automatic annual grants of 30,000 options on the date of the annual meeting under a stockholder-approved non-discretionary plan.

Issue

Whether Desimone had standing under Section 327 to challenge option grants made before he became a stockholder, whether demand was excused under Rales for the employee and officer grant claims, and whether the complaint stated a claim as to the outside director grants. Also at issue was whether allegations about the board's allegedly inadequate investigation could preserve the derivative action.

Rule

A derivative plaintiff must own stock at the time of the challenged transaction under 8 Del. C. § 327, and the continuing wrong doctrine is narrow and does not confer standing merely because later similar wrongs or later cover-up activity occurred. Under Rales, demand is excused only if particularized facts create a reasonable doubt that, at filing, the board could exercise independent and disinterested business judgment, including because at least half the directors face a substantial likelihood of personal liability. For oversight claims, liability requires facts suggesting the directors knew controls were inadequate and consciously failed to act; conclusory allegations that wrongdoing occurred do not suffice.

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In Phoenix, Sonoran Grid Systems granted stock options to engineers in 2021 and 2022. Maya Ortiz bought her shares in March 2023, then filed a derivative suit in 2025 challenging those earlier grants after the company disclosed an options-related accounting restatement and alleged concealment efforts by management.

Does Maya have standing to challenge the 2021 and 2022 grants on the theory that the later restatement and concealment made the earlier misconduct a continuing wrong?

Explanation. Section 327 requires ownership at the time of the challenged transaction. The court treated each option grant as a discrete transaction completed when issued. Later similar grants, later revelation, restatements, or cover-up activity do not transform earlier grants into a single continuing wrong. The doctrine is narrow and does not depend on whether the plaintiff bought shares to sue.