Very Interesting Court case - Stock Options and Mergers

Supreme Court Affirms Stock Option Claims As Derivative

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In Feldman v. Cutaia, (Del. Supr., May 30, 2008), read opinion here,
the Delaware Supreme Court today affirmed the Chancery Court's ruling
that, based on the facts before it, a stock option-related claim was a
derivative cause of action and not a direct claim.  The Chancery
Court's decision was summarized here on this blog.

Delaware's High Court summarized the appeal presented to it in this case as follows:

The
plaintiff-appellant, Peter Feldman, appeals from a final judgment
entered by the Court of Chancery following its issuance of a Memorandum
Opinion and Order. The Court of Chancery dismissed all fourteen counts
of Feldman’s Third Amended Complaint finding that the claims therein
were solely derivative in nature. Applying this Court’s holding in Lewis v. Anderson,
1 the Court of Chancery held that Feldman lacked standing to pursue
those derivative claims following a third-party merger (the “Merger”)
in which all of his stock of the nominal defendant, The Telx Group,
Inc. (“Telx” or the “Company”), was cashed out.
In this appeal,
Feldman’s sole argument is that the Court of Chancery erred in
dismissing Count XIII of the Third Amended Complaint. In that count,
Feldman alleges that he received inadequate consideration from the
Merger because of stock options previously issued to three of the
defendants-appellees. According to Feldman, the allocation of the
Merger
consideration to those stock options directly harmed him
because he was paid less for his shares in the Merger than he would
have been if the options had not existed. 

Relying upon this Court’s decision in Tooley v. Donaldson, Lufkin & Jenrette, Inc.,
2 Feldman contends that his claim in Count XIII was an individual one
and not derivative in nature. Feldman submits that Telx’s directors had
an affirmative duty to reconsider the validity of the stock options at
the time of the Merger and their failure to do so gave rise to a
separate and direct claim of harm. The appellees argue that, following this Court’s landmark decision in Tooley, except in the inapplicable limited circumstances involving controlling stockholders, described in Gentile v. Rossette 3 and Gatz v. Ponsoldt,
4 a claim that stock options have been wrongly issued to management
states a claim for waste and is solely derivative in nature.

The
Court of Chancery characterized Feldman’s contention that Count XIII
states a direct claim as “a bootstrap argument.” The Court of Chancery
concluded that the alleged diminution of Feldman’s share of the Merger
proceeds in Count XIII are the same damages that flow from the alleged
harm under the predicate derivative claims in those counts of the Third
Amended Complaint that challenged the validity of the stock options.
The Court of Chancery held that Count XIII was a creative but
unsuccessful attempt to recast a derivative claim as a direct claim. We
have determined that the judgment of the Court of Chancery must be
affirmed.

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1. Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984).

2. Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
3. Gentile v. Rossette, 906 A.2d 91, 99-101 (Del. 2006).
4. Gatz v. Ponsoldt, 925 A.2d 1265, 1277-81 (Del. 2007).