Opinion ID: 2197807
Heading Depth: 3
Heading Rank: 1

Heading: The Parties' Course of Conduct

Text: Plaintiffs-appellees suggest, and the Vice Chancellor accepted, that AT & T's course of conduct established AT & T's belief that the options' time value was required to be preserved  a course of conduct arguably supporting the parties' intended meaning of the term economic position. But, plaintiffs-appellees and the Vice Chancellor spent no time discussing the fact that, in each of the previous transactions, the transactions were stock for stock transactions  not cash outs. When reviewing the MediaOne-AT & T merger, the Vice Chancellor noted [t]his discussion here focuses on the adjustment calculated for those persons who elected to receive adjusted AT & T options. The Vice Chancellor never explained why he disregarded the cash election in that merger, nor did he address why the stock for stock election better evidenced the parties' intent in the context of the dispute in this case  a cash out merger. In the transactions the Vice Chancellor considered, AT & T replaced plaintiffs-appellees' options to buy stock in the pre-merger company with options to buy post-merger stock. AT & T argues that these prior events demonstrate that options were adjusted consistently to mirror adjustments to the underlying security. But these transactions were also distinguishable from the Cingular-Wireless merger precisely because they were stock for stock transactions. Therefore, they did not necessarily evidence what the parties intended to occur in a cash out merger. In the case of a stock for stock merger, option holders expect to have their old options replaced with new options because the old (underlying) stock is being replaced with new (underlying) stock. In such a transaction, by its very nature, the economic position of the options will invariably incorporate the expected time value of the new options. But where the stock and the options are to be cashed out in a merger, the option holders can have no expectation of receiving replacement options in new stock. Instead, option holders will, and expect to, receive only cash representing intrinsic value for their options. The question presented in this case is whether, in order to protect option holders' economic position, the option holders must receive additional compensation where they receive cash and not stock. The cash election in the MediaOne-AT & T merger is the only earlier transaction that included a cash component. It, therefore, is the only transaction similar to the one at issue here. In the MediaOne-AT & T merger, shareholders and option holders could elect to receive (1) cash, (2) new stock or (in the case of option holders) new options, or (3) a combination of both cash and stock (or options). Stockholders electing cash would receive $85 per share, and the option holder would receive $85 per share minus the exercise price of the options. Under plaintiffs-appellees' interpretation of Section XVIII.A, option holders in the MediaOne-AT & T merger should have received additional compensation above the cash out for $85 per share in order to compensate option holders for the lost time value. Yet, in that merger, option holders who might have chosen the cash out would have received intrinsic value only. They would not have received additional compensation for the time value of the options. Logically, option holders in that merger electing cash would have received the intrinsic value, $85, cash only, because those who wished to preserve time value would have elected the offered options designed to preserve time value in the surviving entity. Because the Vice Chancellor did not address the distinction between a cash out merger and a stock for stock merger and the significance of that distinction in evaluating the extrinsic evidence of contractual intent, we remand this case for him to reconsider the evidentiary importance of the parties' course of conduct in the MediaOne-AT & T transaction.