Court: Court of Appeals for the Third Circuit; July 7, 2009; Federal Appellate Court
Appellant Wallace Barr initiated a class action on behalf of former officers, directors, and employees of Caesars Entertainment, Inc. against Harrah’s Entertainment, Inc., alleging breach of contract and seeking specific performance due to an inadequate cash-out price of over $20 million following a merger agreement in 2004. The District Court granted summary judgment to Harrah’s, determining that class members received all entitled benefits under the agreements. Key to the case is the interpretation of Caesars' 1998 Stock Incentive Plan, which was established when Caesars was spun off from Hilton Hotels Corporation. The 1998 Plan stipulated that all stock options would vest upon a "Change in Control," defined as shareholder approval of a merger, allowing option holders to cash out at a price based on the higher of specified stock prices within a defined period. Additionally, the 2001 Supplemental Retention Plan provided "Rights" equivalent to shares that vested upon retirement or a Change in Control, while the 2004 Long Term Incentive Plan offered Restricted Stock Units (RSUs) that also vested upon merger completion. Both the 2001 and 2004 Plans were unfunded.
In July 2004, Caesars and Harrah’s entered into a merger agreement where Harrah’s would acquire all of Caesars’ common stock. Caesars’ shareholders approved the merger in March 2005, triggering a Change of Control under the 1998 Plan. Shareholders could choose to receive either $17.75 in cash or up to 0.3247 shares of Harrah’s stock for each share of Caesars’ stock, with a significant majority opting for Harrah’s stock. As a result, they received 0.2212 shares of Harrah’s plus $5.66 in cash, valuing their total receive at $21.85 per share.
The merger agreement also addressed equity awards for Caesars’ management and employees. Stock options held under the 1998 Plan were converted to options for Harrah’s stock at the non-prorated exchange ratio of 0.3247, while SRUs and RSUs were similarly converted. This resulted in holders receiving $23.76 per equity award unit, exceeding the $21.85 per share received by shareholders.
The key legal issue arose over the definition of "highest price per share of Common Stock" for Caesars option holders who cashed out. Barr, representing the option holders, claimed they were entitled to the higher amount of $23.76, while Harrah’s maintained that the rightful amount was $21.85. The District Court certified Barr's class in May 2007, but later ruled that class members were only entitled to the $21.85 amount, rejecting Barr’s arguments about the definition of "Common Stock." The Court found that Barr's interpretation, which included treasury and unissued stock, contradicted the clear language and common understanding of "Common Stock" as defined in the 1998 Plan.
The Court determined that the term "highest price per share of Common Stock" in section 7(c)(ii) of the 1998 Plan does not apply to equity interests like Stock Replacement Units (SRUs) and Restricted Stock Units (RSUs), which were not in existence at the time the Plan was adopted. The Court rejected Barr's argument that payments to SRU and RSU holders were for the underlying Caesars stock, noting that no shares were associated with those awards. Caesars contested the District Court’s conclusion that the relevant price was $21.85 paid to shareholders, arguing it should be the $23.76 paid to SRU and RSU holders. However, the Court clarified that even if "Common Stock" included more than just issued shares, the language in the 1998, 2001, and 2004 Plans does not support Barr’s claim regarding the Change in Control Price being based on SRUs and RSUs. The Court emphasized that equity awards for management are separate from common stock, and thus the "highest price per share of Common Stock" reflects the value paid to actual shareholders in the merger, not to holders of other equity awards. Barr's interpretations regarding "per share" and the nature of the compensation for SRUs and RSUs were dismissed, as these awards did not confer a right to receive Caesars stock in the context of the merger. Ultimately, the Court agreed with the District Court’s interpretation that the relevant price pertains solely to Caesars shareholders’ payments under the merger agreement.
The judgment of the District Court is affirmed regarding the 1998 Plan adopted by Caesars, formerly known as Park Place Entertainment Corporation. "Company Stock" refers to the common stock shares of Caesars issued under the Supplemental Retention Plan. Due to timing issues, Caesars option holders received a total of $21.85 in two payments: $20.89 initially and $0.96 later. Barr received over $30 million for his options. The District Court had jurisdiction under 28 U.S.C. § 1332, while appellate jurisdiction is under 28 U.S.C. § 1291. The appellate court exercises plenary review of the District Court's summary judgment decisions. The agreements' terms are deemed clear and unambiguous, negating the need for extrinsic evidence presented by Barr regarding the 1998 Plan's meaning. The court found that Barr's extrinsic evidence did not support his interpretation, particularly noting that testimony from Caesars' officers did not indicate that option holders were entitled to more than Caesars shareholders. Barr argues the District Court misapplied the legal standard, but the court correctly identified Delaware contract law and determined that a reasonable interpretation of the 1998 Plan does not support Barr's claim for greater compensation than that of Caesars shareholders.
