Death Knell for Incentive Stock Options

A federal court in Florida just ruled that restricted actions (on which most incentive stock options are based) it cannot have any value simply because it is restricted. (Visit the site below for the court’s opinion.) Williamson v. Moltech Corporation started in New York in 1995. Although you are now in bankruptcy court, New York law applies in this case, not bankruptcy law.

Start-up companies often use stock restriction that want to reward employees and / or attract needed employees. The shares are restricted because when the company makes an initial public offering (IPO), the underwriters of the offering do not want the directors of the company to sell their shares in the IPO, as this would undermine confidence in the company. Usually the restriction is lifted after a period of time after the IPO.

This new ruling would mean that any company can grant incentive stock options based on restricted shares and then repeal its agreement, leaving its employee with no recourse. This would be the case, even if the value of the company had risen astronomically. Clearly, this does not meet the test of reason.

This decision destroys as impracticable the use of incentive stock options and the restricted shares underlying them for compensation purposes. Companies that want quality technologists and managers, but with little cash to compensate them, will now find that the previously valuable technique of granting incentive stock options must be rejected by knowledgeable employees, who realize that the company may default. your incentive stock option agreement. with your employee at any time with impunity. Therefore, at any point after helping build the business, the employee could be left with nothing for their capitalization efforts. Since companies will no longer be able to compensate their employees with stock options, more cash will be required, leading to the drought of technological advancement.

In addition, the court did not comply with the previous ruling by the New York courts denying Moltech’s summary judgment on the claim for damages related to the incentive stock options, although the court is required to give courtesy to the New York ruling. low res judicata. (Visit the site below to view the denial of New York’s summary judgment.) The court gives no apparent reason for its total disregard of the earlier New York ruling.

New York law requires that damages be measured at the time of violation. Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186 (2nd Cir. 2003). Also, when there is no market for stocks, such as restricted stocks, a hypothetical market model is used to establish the value between a buyer and a seller. Boyce v. Soundview Technology Group, Inc. 2004 WL 2334081 (SDNY 2004) vacated and returned for damage by Boyce v. Soundview Technology Group, Inc. 464 F.3d 376 (2nd Cir. 2006); Boyce is likewise a bankruptcy case. Therefore, although Williamson v. The Moltech issue was in bankruptcy court, the bankruptcy ten years later cannot have any effect on the value at the time of the infringement. The court appears to have had trouble with this, recognizing that the valuation must take place at the time of infringement under New York law, but also introducing language related to cancellation of actions through approval of the bankruptcy plan, which is clearly unenforceable. .

Of greatest interest is the prior court hearing. (Visit the site below to view the hearing transcript.) The reader will find the court’s comments at the top of page 31 very interesting, as this hearing was before the court received any evidence of Williamson’s assessment. Indeed, Williamson presented in court evidence of the restricted value of the shares in the form of undisputed valuations, among others, made by Moltech’s own analysts / auditors, including Price-Waterhouse and Moltech’s share sales (quite common Las sales of shares were made as preferred instruments convertible into ordinary shares).

Therefore, if the judgment in this case were to stand, it would result in a loss of stock options by the employees who hold them if your company decides to breach its incentive stock option agreements. Companies could breach such pre-IPO agreements by leaving the employee on the ground and without high-value stock after the IPO. Naturally, the incentive stock options would lose their luster in exchange for compensation. High-tech startups would suffer.

The case is currently on appeal in the US District Court for the Northern District of Florida, Gainesville Division, Case No. 1: 07-cv-00016.

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