AT&T Corp. v. Lillis, et al., No. 490, 2007 (Del. May 22, 2008)
In an appeal from the Court of Chancery, the Delaware Supreme Court upheld a determination that the term “economic position,” as set forth in a stock option plan’s anti-dilution/anti-destruction provision, was ambiguous, but remanded the case to the Court of Chancery to determine whether that term might have different meanings in cash and stock mergers, and whether an option can be said to have time value in a merger in which it is cashed out. In 2004, all securityholders of AT&T Wireless were cashed out in a merger with Cingular. Accordingly, each AT&T Wireless option holder received for each option held the difference between the per-share merger price and the option’s strike price (i.e., the option’s “intrinsic value”). Plaintiffs-appellees and former option holders argued that the duty to preserve their “economic position” under the stock option plan required not only payment of the option’s intrinsic value but also payment for its potential future value over the term of the option (or time value). Agreeing with plaintiffs, the Court of Chancery awarded damages to account for the lost time value of the options. Although upholding the Court of Chancery’s determination that the term “economic position” was ambiguous, the Supreme Court concluded that, in reaching a determination that the options’ “economic position” included time value, the lower court had failed to consider (i) the significance that, unlike prior transactions in which option holders received new options, thereby allowing them to retain the time value as well as intrinsic value of their options, the 2004 transaction was a cash-out merger, and (ii) whether options could, in fact, be worth more than their intrinsic value immediately prior to a cashout merger when option holders, like stockholders, could expect to receive only the cash paid in the merger for the underlying shares and had no expectation of future ownership of the options.