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CALIFORNIA CORPORATE & SECURITIES LAW

Corporation Owes No Duty To Warn Former Director Of Impending Option Expiration

Does a corporation commit constructive fraud if it fails to warn a former director of the impending expiration of a stock option?  That was one question decided earlier this month by Judge Jennifer A. Dorsey in  Nelson v. FluoroPharma Med., Inc., 2016 U.S. Dist. LEXIS 1270 (D. Nev. Jan. 4, 2016).  In granting summary judgment for the company, Judge Dorsey concluded:

Certainly, a corporate director like Nelson would owe a fiduciary to the corporation, FluoroPharma, which he represented from 2005-2009.  But Nelson offers no authority to suggest that the converse is also true: that FluoroPharma owed Nelson a fiduciary duty—more than two years after his service on the board ended—to notify him of the impending expiration of his stock options. Because Nelson has not pointed to any evidence or legal authority to support the existence of such a relationship, I cannot infer that Nelson “repose[d] a special confidence in” FluoroPharma and its representatives that would give rise to the fiduciary or special relationship necessary to establish this claim. (footnotes omitted)

The company is a Nevada corporation and Judge Dorsey cited Nevada authority in her analysis of the erstwhile director’s constructive fraud claim.  The director also asserted claims for breach of contract and the implied covenant of good faith and fair dealing.  In granting summary judgment to the company on these claims, Judge Dorsey applied Delaware law because the option agreement included a Delaware choice of law provision.  One wonders, however, what the rationale was for a Nevada corporation to provide for the application of Delaware law to option grants.

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