Matter of Comverse Technology, Inc. Derivative Litigation

In March 2006, the Wall Street Journal published an article reporting that grants of stock options were seemingly being illegally backdated at certain corporations, including Comverse Technology, Inc. (Comverse). Backdating stock options increased a corporation’s costs. The article identified Comverse’s chief executive officer, Jacob Alexander, as a possible recipient of backdated stock options. Soon after receiving media inquiries about backdated options, Comverse’s board of directors appointed a two-member special committee to investigate the issue. One of the special committee’s members, Ron Hiram, was also on the company’s three-member compensation committee. The special committee began interviewing directors and announced the possibility of needing to revise financial statements. In April 2006, Comverse shareholders (the shareholders) (plaintiffs) initiated a derivative suit against numerous officers and directors of Comverse (collectively, the directors) (defendants). The complaint alleged that a few directors had been a part of a scheme to backdate options (backdating directors), the company’s compensation committee had not inquired into obviously misstated issuance dates, and the compensation committee had recklessly or knowingly approved the grants. The complaint also alleged that making a pre-suit demand on the board of directors to initiate the action would have been futile because the alleged misconduct was egregious and not the product of sound business judgment. In mid-2006, government agencies announced civil and criminal charges against the backdating directors, at which time the special committee acted to sever relationships with those individuals. The directors moved to dismiss the complaint on grounds that a demand would not have been futile because a special committee had already been appointed to protect Comverse’s interests. The trial court agreed with the directors and dismissed the complaint. The shareholders appealed.