At&T Corp. v. Lillis

• Citation: 953 A.2d 241
• Decision Date: 22 May 2008
• Docket Number: No. 459, 2007.,No. 490, 2007.,490, 2007.,459, 2007.
• Parties: AT&T CORP., Defendant Below, Appellant, v. Charles LILLIS, Gary Ames, Richard Post, Frank Eichler Robert Crandall, Lou Simpson, Pierson Grieve, Richard McCormick, Janice Peters, Pearre Williams, Roger Christensen, Doug Holmes, Steven Boyd, Patti Klinge, Connie Campbell, Sharon O'Leary, Jim Taucher, Bud Wonsiewicz and Daniel Yohannes, Plaintiffs Below, Appellees. AT&T Corp., Defendant Below, Appellant, v. Charles Lillis, Gary Ames, Richard Post, Frank Eichler Robert Crandall, Lou Simpson, Pierson Grieve, Richard McCormick, Janice Peters, Pearre Williams, Roger Christensen, Doug Holmes, Steven Boyd, Patti Klinge, Connie Campbell, Sharon O'Leary, Jim Taucher, Bud Wonsiewicz and Daniel Yohannes, Plaintiffs Below, Appellees. Charles Lillis, Gary Ames, Richard Post, Frank Eichler Robert Crandall, Lou Simpson, Pierson Grieve, Richard McCormick, Janice Peters, Pearre Williams, Roger Christensen, Doug Holmes, Steven Boyd, Patti Klinge, Connie Campbell, Sharon O'Leary, Jim Taucher, Bud Wonsiewicz and Daniel Yohannes, Plaintiffs Below, Appellees/Cross Appellants, v. New Cingular Wireless Services, Inc., f/k/a AT&T Wireless Services, Inc., Defendant Below, Cross Appellee.
• Court: United States State Supreme Court of Delaware

953 A.2d 241

AT&T CORP., Defendant Below, Appellant, v. Charles LILLIS, Gary Ames, Richard Post, Frank Eichler Robert Crandall, Lou Simpson, Pierson Grieve, Richard McCormick, Janice Peters, Pearre Williams, Roger Christensen, Doug Holmes, Steven Boyd, Patti Klinge, Connie Campbell, Sharon O'Leary, Jim Taucher, Bud Wonsiewicz and Daniel Yohannes, Plaintiffs Below, Appellees.

AT&T Corp., Defendant Below, Appellant, v. Charles Lillis, Gary Ames, Richard Post, Frank Eichler Robert Crandall, Lou Simpson, Pierson Grieve, Richard McCormick, Janice Peters, Pearre Williams, Roger Christensen, Doug Holmes, Steven Boyd, Patti Klinge, Connie Campbell, Sharon O'Leary, Jim Taucher, Bud Wonsiewicz and Daniel Yohannes, Plaintiffs Below, Appellees.

Charles Lillis, Gary Ames, Richard Post, Frank Eichler Robert Crandall, Lou Simpson, Pierson Grieve, Richard McCormick, Janice Peters, Pearre Williams, Roger Christensen, Doug Holmes, Steven Boyd, Patti Klinge, Connie Campbell, Sharon O'Leary, Jim Taucher, Bud Wonsiewicz and Daniel Yohannes, Plaintiffs Below, Appellees/Cross Appellants, v. New Cingular Wireless Services, Inc., f/k/a AT&T Wireless Services, Inc., Defendant Below, Cross Appellee.

No. 490, 2007.

No. 459, 2007.

Supreme Court of Delaware.

Submitted: March 12, 2008.

Decided: May 22, 2008.

Court Below: Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 717.

Upon appeal from the Court of Chancery. REMANDED.

A. Gilchrist Sparks, III (argued) and John P. DiTomo, Morris Nichols Arsht & Tunell LLP, Wilmington; Delaware; Todd Schiltz, Wolf Block Schorr and Solis-Cohen LLP, Wilmington, Delaware for Defendant Below, Appellant AT & T Corp.

Kevin Abrams and Nathan A. Cook, Abrams & Laster LLP, Wilmington, Delaware; Miranda S. Schiller (argued), Weil Gotshal & Manges LLP, New York, New York pro hac vice for plaintiffs/appellees/cross appellants.

Before STEELE, Chief Justice, HOLLAND, BERGER, JACOBS and RIDGELY, Justices, constituting the court en banc.

STEELE, Chief Justice.

Plaintiffs-appellees, who are former directors and officers of MediaOne Corp., seek compensation for stock options¹ that were cashed out in a 2004 merger between AT & T Wireless and Cingular. MediaOne originally granted its directors and officers options under a 1994 stock option plan. An anti-destruction, anti-dilution clause in that 1994 stock option plan preserved the option holders' "economic position" upon the happening of certain specified events, including a merger.

AT & T acquired MediaOne in a stock for stock merger in 1999. In that merger, plaintiffs-appellees' MediaOne options were converted into AT & T options and continued to be governed by the terms of the 1994 MediaOne plan.

In 2001, AT & T spun off Wireless. In that transaction, all AT & T options holders, including plaintiffs-appellees, received new options in Wireless. An Employee Benefits Agreement and Wireless Adjustment Agreement governed the new Wireless options created through the spin off. In addition to those two agreements, the 1994 MediaOne stock option plan also continued to govern plaintiffs-appellees' new options in Wireless.

In 2004, Cingular agreed to a cash out merger with Wireless. In that transaction, which gave rise to this dispute, Wireless options holders were cashed out at $15 per share minus the exercise price of the option.

The plaintiffs-appellees who originally received options in MediaOne that were converted into Wireless options as a result of the foregoing transaction filed a complaint in the Court of Chancery against defendant-appellant AT & T and defendant-cross appellee Cingular. The plaintiffs claimed that Wireless (now Cingular) violated the terms of the 1994 plan when it cashed out plaintiffs-appellees' Wireless options without any compensation for the lost "time value" of their options.² Plaintiffs-appellees argued, in the alternative, that AT & T is liable for any breach of the 1994 plan by Wireless because AT & T had a duty to obligate Wireless legally to observe those terms.

In a letter to plaintiffs' counsel and in its answer to the complaint, AT & T initially took the position that Wireless could not cash out any Wireless options³ based on AT & T's understanding of the Employee Benefits Plan and the Wireless Adjustment Plan, which governed all Wireless options created in the 2005 spin off. In order to bind Wireless to its contractual duties as AT & T saw them, AT & T arbitrated its dispute with Wireless. After a hearing, the arbitration panel found that Wireless did not breach either of those plans. AT & T then changed litigation strategy in the Court of Chancery, by asserting that the 1994 plan did not proscribe Wireless from cashing out the options. Although AT & T acknowledged that the 1994 plan required AT & T to preserve plaintiffs-appellees' "economic position" "immediately prior" to a merger, it argued that in the context of a cash out merger, plaintiffs-appellees' "economic position" was limited to the intrinsic value of the options.

A Vice Chancellor denied cross motions for summary judgment, holding that Section XVIII.A of the 1994 plan controlled the plaintiffs-appellees' options,⁴ but that the term "economic position" in that section was ambiguous. The Vice Chancellor then held a trial to consider extrinsic evidence that could aid him in interpreting that term.

Interpreting Section XVIII.A., the Vice Chancellor noted AT & T's initial position that Wireless could not cancel the stock options and accorded "great weight" to AT & T's initial stance. The Vice Chancellor also found that the parties' earlier transactions, where stock options were replaced with new stock options, demonstrated that the parties intended to preserve the time value of the options in each transaction. Because Wireless did not preserve the time value of the options in the 2004 merger, he found AT & T liable for a breach of the 1994 plan. The Vice Chancellor further found that AT & T had not transferred the 1994 MediaOne plan's obligation to Wireless and, thus, did not hold Cingular liable.

On appeal, we uphold the Vice Chancellor's conclusion that the term "economic position" is ambiguous because both plaintiffs-appellees and AT & T present reasonable interpretations of Section XVIII.A. On the one hand, the phrase "economic position" of a stock option is broad enough to encompass the prospect that its worth will increase over time, i.e. time value. On the other hand, in a cash out merger, option holders would expect to receive only a fixed cash sum when the merger becomes effective. In that context, the "economic position" of the options would not include any future value since the options will no longer exist. Instead that term would only incorporates the right to receive the options' intrinsic value.

To resolve that ambiguity, we must consider what the extrinsic evidence shows the term "economic position" was intended to mean in the context of a cash out merger. The Vice Chancellor concluded that that term was intended to encompass the time value of the options in any merger, including a cash out merger. Having reviewed the Vice Chancellor's opinion, we conclude: (1) that he declined to address the difference between a cash out merger and a stock for stock merger for purposes of interpreting "economic position;" and, (2) that he declined to consider the importance of the $85 cash election in the MediaOne-AT & T merger. Because we believe the cash election in the MediaOne-AT & T merger most closely resembles the cash out merger here, we REMAND the case for the Vice Chancellor to address fully the significance of (i) the distinction between a stock merger and a cash out merger; and, (ii) the $85 cash election in the AT & T-MediaOne transaction, in deciding what the contracting parties intended by their use of the term "economic position."

We also find that the Vice Chancellor should not have given any evidentiary weight to AT & T's supposed admission because those supposed admissions did not relate to the interpretation of the 1994 plan. Thus, the Vice Chancellor should not afford AT & T's supposed admissions any weight on remand.

FACTS AND PROCEDURAL HISTORY

Plaintiffs-appellees are former officers and directors of MediaOne Corp. MediaOne adopted a stock option plan in 1994 and granted stock options to plaintiffs-appellees. Section XVIII.A of the 1994 plan protects plaintiffs-appellees' options through an anti-destruction, anti-dilution provision. That Section reads:

In the event there is any change in the Common Stock by reason of any consolidation, combination, liquidation, reorganization, recapitalization, stock dividend, split-up, split-off, spin-off, combination of shares, exchange of shares or other like change in capital structure of the [MediaOne], the number or kind of shares or interests subject to an Award and the per share price or value thereof shall be appropriately adjusted by the Committee at the time of such event, provided that each Participant's economic position with respect to the Award shall not, as a result of such adjustment, be worse than it had been immediately prior to such event. [emphasis added]

In 1999, AT & T entered into merger discussions with MediaOne, and agreed to purchase MediaOne for a fixed ratio of AT & T's stock, or $85 per share, or a combination of cash and stock. In these negotiations, AT & T agreed to convert plaintiffs-appellees' MediaOne options into AT & T options that would be governed by the terms of the 1994 MediaOne plan. In that merger, option holders had three alternatives: (1) they could convert all of their MediaOne options into AT & T options; (2) they could cash out all of their options at $85 per share minus the option's exercise price; or (3) they could receive a combination of new options and cash.⁵

After AT & T acquired MediaOne, AT & T completed three transactions that required adjustments to plaintiffs-appellees' options as prescribed by Section...