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Delaware Chancery Court Addresses the Cancellation Value of Employee Stock Options in Mergers
July 27, 2007 Read the memo
In a decision filed on July 20, the Delaware Court of Chancery served notice that the ability to cancel out-of-the-money employee stock options without consideration depends entirely on the provisions of the governing stock option plan, and that less-than-clear language in such plans will not be interpreted against the interests of option holders. While the Chancery Court's holding is based on its interpretation of specific language in the plan at issue, the opinion provides rare guidance on when underwater options may be cancelled, and awards damages to all option holders (including in-the-money holders), based on the "economic value" of the options determined by the Black-Scholes options pricing method.