London v. Tyrrell

Craig London and James Hunt (plaintiffs) were stockholders with Michael Tyrell, Patrick Neven, and Walter Hupalo (defendants) in a government-contracting firm called iGov. Tyrell was chief financial officer, while the other four comprised the board of directors. London and Hunt alleged the others secretly decided to implement an option plan at an unfair price. Shareholders had approved an option plan requiring a minimum exercise price of the fair market value of iGov stock as of the grant date, but iGov had Chessiecap Securities Inc. (Chessiecap) value iGov’s stock as of July 31, 2006, months before options were granted. Tyrell allegedly gave Chessiecap misleading and incomplete information, asked it to revise its initial valuation downward, and omitted that the Department of Homeland Security (DHS) was about to award iGov a lucrative contract. Tyrrell also allegedly changed the company’s financial forecast to account for negative events after the valuation date, but not positive developments, resulting in Chessiecap valuing iGov at $4.7 million, or $4.92 per share. Meanwhile, Tyrell sent a forecast projecting revenues over $3 million to a potential lender. When London and Hunt obtained Chessiecap’s report at the end of 2006, London objected to the stale valuation. Hunt offered to buy others out at $28 per share—a $20 million valuation—but was rejected. The board removed London and Hunt, elected Tyrell, approved the share price, and granted options at $4.92 per share to 16 employees including the directors themselves in February 2007. In March, DHS awarded iGov the contract. April quarterly reports showed income exceeding forecasts, but the board granted another employee $4.92 options in May. London and Hunt brought a derivative action against the new board. The board moved to dismiss, arguing the claimants failed to make a demand or adequately plead demand futility. London and Hunt countered that a demand on the new board would have been futile.