Opinion ID: 1401512
Heading Depth: 2
Heading Rank: 3

Heading: stock option

Text: ¶ 33 We now address Dixon's claim concerning the stock option he attempted to exercise in March of 1996. [4] Dixon maintains that he can sue for profits he allegedly would have realized by purchasing registered stock from Rentrak at the price stated in the consulting agreement and immediately reselling it on the open market. The district court dismissed this claim, ruling that because the consulting agreement did not specify that the stock option would be for registered, freely tradeable stock, the law presumes that the option was for unregistered, restricted stock that could not be resold for at least one year. The district court also concluded that the parties understood this presumption. It stated: When two people who are engaged in the kind of business that this contract implies, both of those people, it seems to me, are prudent enough to understand the implications of a stock option. And in that regard, I think, not even negotiating the stock option, by implication there is an expectation, if not in fact  well, there's a presumption that the people negotiating the stock option know[] what that implies and understand[] stock and how it can be traded. ¶ 34 Whether the stock option provision granted Dixon an option to purchase registered stock or unregistered, restricted stock is a question of contract interpretation. As stated in Broyles v. Synercon Corp., 512 S.W.2d 288 (Tenn.1974), `a stock option agreement is subject to the same rules of construction as any ordinary option, agreement, or contract. The courts in construing such agreements seek to give effect to the intent of the parties....' Id. at 290 (quoting 18 Am.Jur.2d Corporations § 303); see also Joseph v. Wilson, 57 Ill.App.3d 212, 14 Ill.Dec. 831, 372 N.E.2d 1110, 1113 (1978) (noting that obligations under stock option contracts, as with any other contract, are determined in accordance with the intent, conduct and purposes of the parties); 18B Am.Jur.2d Corporations § 1962 (1985) (stating that stock option agreements are generally subject to rules of contract construction). ¶ 35 Here, the consulting agreement provides: Effective as of the date hereof and, in partial consideration for your agreement with respect hereto, you shall be granted by Rentrak (a) an option to purchase 25,000 shares of Rentrak common stock, immediately exercisable for five years from the date of grant, at a per share exercise price equal to the average of the high and low prices for Rentrak's common stock as quoted on the Nasdaq National Market System as reported by the Wall Street Journal on the date hereof.... Nowhere in the agreement is there any indication what kind of stock the parties intended the stock option to entail. ¶ 36 In oral argument before this court, Rentrak conceded that the parties could have specified that Dixon would be entitled to exercise the stock option for registered, freely tradeable stock. [5] Rentrak argues, however, that because such a provision was not included in the consulting agreement, the law presumes that the parties contracted for unregistered stock that Dixon could not have resold immediately. Rentrak asserts that under controlling federal and state laws, the transferability of stock in a public company such as Rentrak is inherently restricted unless it is registered with the Securities Exchange Commission or statutorily exempt from registration. See 15 U.S.C.A. § 77e (1997); Utah Code Ann. § 61-1-7 (Supp.1999). Rentrak also points to S.E.C. rule 144, which provides that unregistered securities acquired from an issuer cannot be resold for at least one year from the date of acquisition. [6] See 17 C.F.R. § 230.144(d); see also Hagerman v. Yukon Energy Corp., 839 F.2d 407, 413 n. 5 (8th Cir.1988) (explaining that S.E.C. rule 144 restricts the transferability of unregistered stock); 17 C.F.R. § 230.144 (1999), Preliminary Note (noting that rule 144 holding period applies to persons who purchase stock that, by statutory exemption, is unregistered). Rentrak asserts that these laws are implicitly contained in the consulting agreement and govern its interpretation. See Beehive Med. Elec. v. Industrial Comm'n, 583 P.2d 53, 60 (Utah 1978) (holding contracts implicitly incorporate existing laws). ¶ 37 Without question, stock must be registered or exempt from registration to be sold, see 15 U.S.C.A. § 77e (1997); Utah Code Ann. § 61-1-7 (Supp.1999), and if unregistered stock is acquired from an issuer, such as Rentrak, it is subject to certain resale restrictions. See generally J. William Hicks, Resales of Restricted Securities §§ 4.01 to 8.06 (1993). These principles, however, do not support the district court's conclusion that where a stock option agreement is silent as to whether the stock will be registered or unregistered, the law conclusively presumes that the parties contracted for unregistered stock. The one-year waiting restriction under S.E.C. rule 144, upon which the district court based its ruling, does not even come into play unless it is first determined that the parties intended the stock option to be for unregistered stock. Cf. McDonald v. Commissioner of Internal Rev., 764 F.2d 322, 323 n. 3 (5th Cir.1985) (noting that rule 144 governs sales of unregistered stock); Vohs v. Dickson, 495 F.2d 607, 620 (5th Cir.1974) (explaining that rule 144 establishes conditions under which unregistered securities may be resold). ¶ 38 Here, the stock option provision contains no terms indicating whether the parties contemplated registered or unregistered stock. The provision is ambiguous in this respect. See Alf v. State Farm Fire & Cas. Co., 850 P.2d 1272, 1274 (Utah 1993) (noting that contract may be ambiguous because it is unclear or omits terms.). Extrinsic evidence is therefore necessary to ascertain the parties' intentions. See, e.g., Turner v. Inventors Eng'g, Inc., 302 Minn. 278, 224 N.W.2d 357, 358-60 (1974) (upholding jury verdict that former corporate officer was entitled to purchase unrestricted stock where stock option agreement did not specify restricted or unrestricted stock). The district court erred in entering summary judgment against Dixon on his claim for damages concerning the stock option. [7]