Fundingsland v. OMH Healthedge Holdings, Inc.
| Decision Date | 18 July 2018 |
| Docket Number | Case No. 15-cv-01053-BAS-WVG |
| Parties | John FUNDINGSLAND, Plaintiff, v. OMH HEALTHEDGE HOLDINGS, INC., Defendant. |
| Court | U.S. District Court — Southern District of California |
James G. O'Callahan, Samantha Kahane Gold, Girardi Keese, Los Angeles, CA, for Plaintiff.
Charles W. Pugh, Rob R. Remington, Hahn Loeser & Parks LLP, Cleveland, OH, Lindsay Jane Mertens, Michael J. Gleason, Hahn Loeser & Parks LLP, San Diego, CA, for Defendant.
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
Hon. Cynthia Bashant, United States District JudgeDefendant OMH Healthedge Holdings, Inc. ("OMH") awarded Plaintiff John Fundingsland stock options as part of his employment compensation. Several years later, another company purchased a controlling interest in OMH. This transaction automatically terminated all of OMH's outstanding stock options awards. And, because Plaintiff had never exercised his options, they were extinguished and became worthless.
As a result, Plaintiff brings this diversity action seeking relief against OMH. He argues OMH breached the parties' contracts by not informing him of the impending transaction. The company now moves for summary judgment on Plaintiff's remaining claims for breach of contract and breach of the implied covenant of good faith and fair dealing under Delaware law. (Mot. Summ. J., ECF No. 47.) Plaintiff opposes. (Opp'n, ECF No. 67.) The Court heard oral argument on the motion. (ECF No. 69.)
Plaintiff fails to demonstrate a triable issue of fact on his breach of contract claim. Nor does he show compelling issues of fairness justify this Court invoking the implied covenant under Delaware law. Therefore, for the following reasons, the Court GRANTS OMH's motion for summary judgment.
Plaintiff John Fundingsland is "an executive with expertise in revenue cycle management and outsourcing phone calls and business processing services in the healthcare industry." (Fundingsland Decl. ¶ 2, ECF No. 67-1.) In early 2011, Plaintiff was recruited to serve as the Chief Operating Officer of OMH's subsidiary in Chennai, India. (Id. ¶ 3.) Plaintiff assumed this role around April 2011. (Joint Statement of Undisputed Facts ("JSUF") ¶ 1, ECF No. 55-1.) As part of Plaintiff's employment compensation, OMH granted him stock options. (Id. ¶ 2.)
OMH is a Delaware corporation. Delaware law allows a corporation to issue stock options. Telxon Corp. v. Bogomolny , 792 A.2d 964, 976 (Del. Ch. 2001) (citing Del. Code Ann. tit. 8, § 157 ). "An option is a right to purchase a stock at a given price." AT & T Corp. v. Lillis , 953 A.2d 241, 244 n.1 (Del. 2008). The designated price "is known as the exercise price. " Id. Typically, when a stock option "vests," the option holder has an immediate right to "exercise" the option and convert it into stock by paying the exercise price. The option, therefore, does not automatically become stock at the time of vesting; the holder must usually take an action—the "exercise"—to obtain the promised shares. See, e.g. , Eluv Holdings (BVI) Ltd. v. Dotomi , LLC, No. CIV.A. 6894-VCP, 2013 WL 1200273, at *10 (Del. Ch. Mar. 26, 2013) (); Knight v. Caremark Rx, Inc. , No. CIV.A. 1750-N, 2007 WL 143099, at *3–4 (Del. Ch. Jan. 12, 2007) ().
The terms of stock options must be "set forth or incorporated by reference in the instrument or instruments evidencing such ... options." Del. Code Ann. tit. 8, § 157. For Plaintiff's stock options, the terms are contained in three interrelated instruments: OMH's 2007 Stock Incentive Plan, the Stock Option Award Agreement, and a Notice of Stock Option Award. (JSUF ¶ 2.) The Court will examine each item in turn.
To promote the success of OMH, the 2007 Stock Incentive Plan ("Stock Plan") establishes a framework for the company to award stock options to its employees, directors, and consultants. (Stock Plan § 1, Pugh Decl. Ex. 1, ECF No. 47-3 at 4.) A person who receives an award of stock options under the Stock Plan is referred to as a "Grantee." (Id. § 2(x).) An "Option" is defined as "an option to purchase Shares pursuant to an Award Agreement granted under the Plan." (Id. § 2(cc).) Plaintiff's "Award Agreement" is the second document discussed below, and the Stock Plan defines this item as "the written agreement evidencing the grant of an award executed by the Company and the Grantee, including any amendments thereto." (Id. § 2(f).)
Beyond establishing a structure for OMH to award options, the Stock Plan sets forth various ground rules for these awards. For example, the Plan speaks to what happens upon the occurrence of a "Corporate Transaction." A Corporate Transaction includes "a merger or consolidation in which the Company is not the surviving entity" and an "acquisition ... of securities possessing more than fifty (50%) of the total combined voting power of the Company's outstanding securities...." (Stock Plan § 2(q).) The Plan provides that a Corporate Transaction affects awarded stock options as follows:
(Id. § 11(a).) Relatedly, the Stock Plan grants its administrator the authority "to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested awards under the Plan." (Id. § 11(b).) The plan administrator may do so "in advance of any actual or anticipated Corporate Transaction" or "at the time of the grant of an Award." (Id. )
The Stock Plan also discusses the suspension or termination of the company's stock option program. (Stock Plan § 14.) It imbues OMH's board of directors with the power to "amend, suspend, or terminate the Plan" at "any time." (Id. § 14(a).) That being said, "any termination of the Plan ... shall not affect Awards already granted, and such awards shall remain in full force and effect as if the Plan had not been ... terminated[.]" (Id. § 14(b).)
Finally, the Plan provides Grantees like Plaintiff with a limited information right: "The Company shall provide to each Grantee, during the period for which such Grantee has one or more Awards outstanding, copies of financial statements at least annually." (Stock Plan § 19.)
Pursuant to the Stock Plan's framework, Plaintiff entered into a Stock Option Award Agreement ("Option Agreement") with OMH. (Option Agreement § 1, Pugh Decl. Ex. 2, ECF No. 47-3 at 22.) This agreement, which is subject to the terms of the Stock Plan, grants Plaintiff the stock options described in an accompanying Notice of Stock Option Award. (Id. ) The Option Agreement provides that these options "shall be exercisable during [their] term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement." (Id. § 2(a).) Further, this agreement states Plaintiff may exercise his options "only by delivery of an Exercise Notice (attached as Exhibit A) which shall state the election to exercise the Option [and] the whole number of Shares in respect of which the Option is being exercised[.]" (Id. § 2(b).)
The Notice of Stock Option Award details the specifics of Plaintiff's stock options. (Notice of Stock Option Award, Pugh Decl. Ex. 3, ECF No. 47-3 at 38.) It provides him the option to purchase 268 shares of OMH's common stock at an exercise price of $2,493.34 per share, for a total cost of up to $668,215.12. (Id. ) The Notice also provides a vesting schedule for Plaintiff's options: his right to purchase the first third of the 268 shares vests on May 23, 2012; the second third vests on May 23, 2013; and the remainder vests on May 23, 2014. (Id. )
Pursuant to the Notice, Plaintiff's options expire on May 23, 2021. (Notice of Stock Option Award.) If Plaintiff separates from the company, however, the Notice states he instead has a three-month period to choose whether to exercise those options that have already vested. (Id. ) Finally, the Notice states that if there is a "Change of Control of the Company whereby a majority ownership is bought by a single investor, all the stock options will vest immediately."1 (Id. )
In sum, the Stock Plan creates the company's stock option program that Plaintiff participated in, and it provides for the termination of any outstanding awards upon a Corporate Transaction. The Option Agreement grants Plaintiff options under this Plan and binds him to the Plan's terms. Last, the Notice of Stock Option Award provides the specifics of Plaintiff's award, including the number of options, the amount he needs to pay per share to exercise the options, and when his options become exercisable and expire.
"Plaintiff's employment as C.O.O. with Defendant's company in India ended in about May 2012." (JSUF ¶ 6.) Thus, under the terms of his stock option award, Plaintiff had only three months from his date of separation to exercise his vested options.2 (Notice of Stock Option Award.) However, when he separated from the company, Plaintiff and OMH entered into a Separation Agreement dated May 28, 2012. (Id. ¶ 7.) The Separation Agreement extended the date for Plaintiff to exercise his options as follows: (Separation Agreement, Pugh Decl. Ex. 4, ECF No. 47-3 at 43.) Further, the Separation Agreement notes:
If a change of control...
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