329 F. Supp. 3d 1123
S.D. Cal.2018Background
- Fundingsland, a former OMH executive, received stock options under OMH’s 2007 Stock Incentive Plan, an Option Agreement, and a Notice of Stock Option Award (268 options, vesting over 2012–2014).
- After Fundingsland left employment in May 2012, the parties executed a Separation Agreement extending his post‑termination exercise period and later amended it, ultimately reducing options to 90 and extending the exercise deadline to Dec. 31, 2013.
- OMH negotiated a sale in 2013, entered confidentiality and exclusivity agreements with the purchaser, terminated the Stock Plan on Aug. 30, 2013, and consummated a Corporate Transaction that, under the Plan, automatically terminated all outstanding awards that were not assumed.
- Fundingsland did not exercise his options before the sale; some employees received “Closing / Change in Control” bonuses but active employees did not exercise options or receive option compensation.
- Fundingsland sued in diversity for breach of contract and breach of the implied covenant (fraud claim dismissed earlier). OMH moved for summary judgment; the court heard argument and granted OMH summary judgment on both remaining claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether OMH breached the Separation Agreement’s “Management Team Options” provision by denying Fundingsland a lump‑sum based on his options after the sale | Fundingsland says the provision entitled him to sell the same percentage of options the buyer allowed the management team to exercise, so he was entitled to payment | OMH says the Stock Plan terminated all unassumed awards in a Corporate Transaction; no management team members exercised any options, so nothing was triggered | Court: No breach — plan language terminated unexercised awards and no exercise by management occurred, so provision was not violated |
| Whether other contract provisions (plan amendment limits, modification clause, annual financial statements, tax withholding clause, Change‑of‑Control vesting term) support breach of contract claim | Fundingsland sought to rely on these additional provisions raised for the first time in opposition | OMH contended Plaintiff never pleaded these provisions and discovery responses did not identify them; allowing new claims now would prejudice OMH | Court: Denied leave to amend and refused to consider new contract theories; summary judgment for OMH on breach claim |
| Whether OMH breached the implied covenant by failing to notify Fundingsland of the impending transaction so he could exercise options | Fundingsland argued an implied duty to give advance notice of a transaction that would terminate his unexercised options | OMH argued the contracts expressly allowed termination in a Corporate Transaction and contained no notice obligation; implied covenant cannot override express terms | Court: No implied‑covenant breach — Delaware law bars implying obligations that conflict with clear contract terms or remedy risks the parties assumed; no rare fairness grounds to re‑write the bargain |
| Whether the circumstances justified quasi‑reformation or implication of a notice term under Delaware law | Fundingsland urged courts to imply the term based on fairness and parties’ expectations | OMH urged courts to enforce express Stock Plan terms and declined to assume parties intended a notice right | Court: No quasi‑reformation; parties could have negotiated anti‑destruction protection but did not, so implied notice not warranted |
Key Cases Cited
- Telxon Corp. v. Bogomolny, 792 A.2d 964 (Del. Ch. 2001) (Delaware recognizes stock option structure and enforceability).
- AT & T Corp. v. Lillis, 953 A.2d 241 (Del. 2008) (discusses distinction between vesting and exercise and anti‑destruction protections).
- Interim Healthcare, Inc. v. Spherion Corp., 884 A.2d 513 (Del. Super. Ct. 2005) (elements of breach of contract under Delaware law).
- Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434 (Del. 2005) (scope and cautious application of the implied covenant of good faith and fair dealing).
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (implied covenant applies only to frustrations of parties’ reasonable expectations and cannot override express contract terms).
- Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (summary judgment legal standard).
- Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (U.S. 1986) (genuine issue of material fact standard).
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (U.S. 1986) (nonmoving party must present specific facts to defeat summary judgment).