Death Knell For Incentive Stock Options

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A federal court in Florida has just ruled that limited stock (on which most of the incentive stock options are based) can not have any value simply because it is limited. (Visit the site below for the court's opinion.) Williamson c. Moltech Corporation was established in New York in 1995. Although it is currently in bankruptcy court, New York law, and not bankruptcy law, applies in this case.

Stock restrictions are typically used by start-ups that wish to allocate 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 company's executives to sell their shares at the time of the introduction. purse, as this would undermine their confidence. Usually, the restriction is lifted after a period following the IPO.

This new decision would mean that any company can award stock options on restricted shares and then repeal its contract, leaving no recourse to the employee. This would be the case, even if the value of the company had increased astronomically. Clearly, this does not meet the test of reason.

This decision unjustifiably destroys the use of incentive stock options and underlying restricted stock for compensation purposes. Companies looking for quality managers and technologists, but with little money to compensate them, will now find the once valuable technique of awarding incentive stock options to be snubbed by savvy employees, who realize that the company may be in breach of its option purchase agreement. with his employee at all times with impunity. Thus, at any time after contributing to the construction of the company, employees may no longer have anything to gain from their sweat efforts. Since companies will no longer be able to pay their employees with stock options, additional cash will be required, which will lead to a drying up of technological advances.

In addition, the court did not observe the earlier decision of the New York courts, which had denied Moltech a summary judgment on the claim for compensation related to the incentive stock options, then that he was required to give courtesy to the decision rendered by the authority of res judicata. (Visit the site below for summary judgment refusal in New York.) The court gives no apparent reason for its total disregard for the earlier New York decision.

New York law requires that damages be measured at the time of the breach. Oscar Gruss & Son, Inc. c. Hollander, 337 F.3d 186 (2d Cir 2003). In addition, when there is no market for equities, as is the case for restricted stocks, a hypothetical market model is used to establish the value between a buyer and a buyer. seller. Boyce v. Soundview Technology Group, Inc. 2004 WL 2334081 (S.D.N.Y. 2004) released and remitted for damages by Boyce v. Soundview Technology Group, Inc. 464 F.3d 376 (2d Cir 2006); Boyce is similarly a case of bankruptcy. So, although the Williamson case v. Moltech was brought to a bankruptcy court, bankruptcy ten years later can have no impact on the value at the time of the breach. The court appears to have had difficulty in doing so, recognizing both that the assessment must take place at the time of the offense under New York law, but also incorporating language relating to the offense. 39; cancellation of shares through the approval of the bankruptcy plan, which is clearly inapplicable. .

The previous hearing in court is also interesting. (Visit the site below for the transcript of the hearing.) The reader will find the comments of the court at the top of the page 31 very interesting because this hearing took place before the court received any evidence of Williamson's assessment. In fact, Williamson presented evidence to the court of the restricted value of the shares in the form of unrefuted valuations, which had been performed by Moltech's own analysts / auditors including Price-Waterhouse and the sale of shares by Moltech sales of shares were made as well as preferred instruments convertible into common shares).

Thus, if the decision in this case were to be confirmed, the employees who would hold them would lose stock options if their company decided not to abide by their purchase option contracts. incentive actions. Companies could breach such agreements before the IPO, which would leave the employee high and dry with no valuable stock after the IPO. Naturally, the incentive purchase options would lose their luster in terms of compensation. The new high-tech companies would suffer.

The case is currently under appeal in the North District District Court of Florida, Gainesville Division, Case No. 1: 07-cv-00016.


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