AT & T Corp. v. Lillis,  (Del. Supr., May 22, 2008), read opinion here. The Delaware Supreme Court in this 34-page opinion reiterates basic contract interpretation principles under Delaware law in the context of stock option rights, including in what instances extrinsic evidence will be considered by the court.  Delaware’s High Court also addresses what weight, if any, should be given to prior admissions in pleadings that are later amended, as well as the difference between a stock for stock merger and a cash-out merger. Prior Chancery Court decisions in this case denying summary judgment, as well as the opinion appealed from after trial, have been summarized here and here.

  The Supreme Court provided its own introductory overview of the case in its opinion, which I quote here in part:

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&TMediaOne 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.


4.  There are three written opinions in this case. Lillis v. AT&T Corp., 896 A.2d 871 (Del. Ch. 2005); Lillis v. AT&T Corp., 904 A.2d 325 (Del. Ch. 2006); Lillis v. AT&T Corp., Del. Ch., C.A. No 717, Mem. Op. (July 20, 2007).