Explore the cautionary tale of a Tampa-based healthcare outsourcing company and the legal repercussions faced by its COO as his stock options became worthless after a controlling interest acquisition. Learn valuable lessons in proactive negotiation and safeguarding stock options in M&A transactions.
M&A Stories
September 18, 2018
In the annals of business acquisitions, the sale of a Tampa-based healthcare outsourcing company serves as a cautionary tale. This company, operating both in the U.S. and India, faced legal repercussions when the Chief Operating Officer (COO) of its Indian subsidiary saw the value of his stock options disappear.
The COO’s stock options were tied to a condition in the company’s plan: they would terminate upon the acquisition of a controlling interest. When a buyer took over on August 30, 2013, the COO found his options worthless. In response, he took the matter to a San Diego federal district court, claiming the company should have notified him of the impending transaction.
The court, however, rejected the notion that the company had an implicit duty to inform the COO. Emphasizing the rarity of implying obligations into contracts, the court suggested that the COO could have foreseen this risk and negotiated protective measures in the stock option documents.
Two potential safeguards were highlighted by the court. First, a provision requiring the company to notify the COO of pending transactions affecting his stock options could have been negotiated. Second, the COO could have secured an anti-destruction clause in the stock option documents, preserving his stock options’ value in the event of a controlling interest sale. Unfortunately, the COO had not pursued either option.
In hindsight, the court underscored the importance of proactive negotiation to mitigate known risks. This case, Fundingsland v. OMH Healthedge Holdings, Inc., serves as a stark reminder for business professionals—especially those in leadership roles—to carefully consider and address potential pitfalls in contractual agreements.
Case Reference:
Fundingsland v. OMH Healthedge Holdings, Inc., Case No. 15-cv-01053-BAS-WVG, United States District Court, S.D. California (June 18, 2018). https://scholar.google.com/scholar_case?case=5359545432512136230&q=%22stock+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
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