Executive Compensation

I already blogged on the ongoing, multi-year saga of AT&T v. Lillis. The case took another turn last week as the Delaware Supreme Court ruled that a state trial court had properly considered AT&T's admissions in its pleadings that stock options of former directors and officers that were cashed out after a merger between AT&T Wireless Services Inc. and Cingular Wireless LLC may have included the future time value of those options.

Plaintiffs, who are former directors and officers of MediaOne Corp., have been seeking compensation for stock options that were cashed out in the 2004 merger. MediaOne originally granted its directors and officers options under a 1994 stock option plan. An anti-dilution clause in the 1994 stock option plan purported to preserve 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, under which plaintiffs' 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 and all AT&T options holders, including plaintiffs, received new options in Wireless. In the 2004 merger, options holders (now with Wireless) were cashed out at $15 per share, minus the exercise price of the option. The plaintiffs filed a complaint against AT&T, claiming that Wireless (now Cingular) violated the terms of the 1994 plan when it cashed out plaintiffs' Wireless options without any compensation for the lost "time value" of their options.

In last week's decision, the Delaware Supreme Court affirmed the Court of Chancery's decision that the stock options included their intrinsic value and their time value, and thus upheld the trial court's award to the option holders of $11,303,986 in damages and prejudgment interest.

I apologize for this long winded explanation, but the moral of the story is simple: We all need to try to avoid this problem before it arises by drafting our stock incentive plans and option award agreements to allow the Company to cash out and/or cancel outstanding stock options at a set price. The plan should limit the circumstances under which the company can cause cash out and/or cancellation (we are not trying to screw employees out of their accumulated value) but plan must provide the company this flexibility.