When a company is acquired in an M&A transaction, its shareholders are generally required to sign what is known as a Letter of Transmittal (“LOT”) in order to sell the shares of stock they own. If your former employer was acquired and you owned vested stock options (whether or not you exercised them), restricted stock, or RSUs in the company, then it’s very likely that you signed an LOT.
The LOT is negotiated between the buyer and seller and rarely, if ever, do the shareholders have an say regarding its terms. Rather, the LOT is usually foisted upon unsuspecting shareholders on a take-it-or-leave-it basis. The LOT contains a litany of fine print that most people do not read.
As relevant here, in many instances, an LOT includes a provision where the shareholder releases all claims against their employer and the company buying it. If enforced, this release could bar you from seeking a remedy for some of the employment-law violations discussed in previous posts (for example, here, here, and here) as well as bar you from securing “appraisal rights” regarding the proper value of the shares of stock you owned.
Releases Included In LOTs Lack Consideration And Therefore Are Unenforceable
If you think this sound unfair then you are not alone. Leo Strine, who is the most prominent M&A-focused judge in America, has concluded that a release in a shareholder’s LOT is not enforceable. Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings Inc., 2010 WL 5276991 (Del. Ch. Dec. 17, 2010) (LOT not a binding contract because the obligation to pay the merger consideration was a pre-existing duty and therefore the LOT lacked consideration). Another recent decision affirmed Judge Strine’s view that a release in an LOT is unenforceable. Cigna Health and Life Insurance Company v. Audax Health Solutions, C.A. No. 9405-VCP. (Del. Ch. Nov. 26, 2014) (the release “lacks any force because the buyer attempted to impose that obligation in a contract lacking consideration”–i.e. the LOT).
The LOT Should Also Be Held To Violate Labor Code Section 206.5 When Applied To Shareholder Equity Compensation
In addition to being unenforceable as a matter of contract law, Section 206.5 of the California Labor Code may provide a separate basis to void the LOT’s release. Under this section an employer is prohibited from requiring an employee to sign a release in order to receive “wages” due to them.
Although no case has addressed the applicability of Labor Code Section 206.5 to an LOT, there is a good reason to believe 206.5 would apply to any LOT that an employee signed in order to receive consideration in respect of their vested equity compensation. Labor Code Section 200 defines “wages” as “all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation.”
Under that definition, stock options, restricted stock and RSUs that were granted to an employee during his or her employment and which vested solely due to the employee’s continued service to an employer ought to be considered “wages” since they are amounts (a set number of shares) and ascertained by a standard of time (monthly or yearly vesting). Indeed, California courts have concluded on numerous occasions that equity grants do constitute a wage. Schachter v. Citigroup, Inc., 47 Cal.4th 610, 619 (2009) (restricted stock granted in lieu of a salary); Ware v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 24 Cal.App.3d 35, 44 (1972) (profit sharing plan); McAfee v. Metropolitan Life Insurance Co., No. Civ. S-05-0227 WBSKJM, 2006 WL 1455431, at fn.7 (E.D. Cal. May 23, 2006) (stock options in the context of an ERISA plan interpretations of “compensation”).
Thus, Labor Code Section 206.5 may provide employees in California with the right to a judicial declaration that the release in the LOT is void. An employee who signed an LOT before realizing s/he had a claim against an employer would be advised to pursue this sort of cause of action under which the employee would also be entitled to recover penalties and attorney’s fees under Labor Code Section 2699.5 (the Private Attorneys General Act). After receiving these awards, the employee would then be entitled to pursue their underlying claim.
If The Release In An LOT Violates The Labor Code Then Your Employer Has Engaged In An Unfair Business Practice
Furthermore, to the extent an LOT violates Labor Code Section 206.5 (or any other provision of applicable law), then it also violates California’s Unfair Competition Law (“UCL”). The UCL allows a plaintiff to recover “restitution”–that is, any amounts that were received by a party as a result of its unlawful or unfair business practice. Claims under the UCL are subject to a four-year-long statute of limitations.
So what did your employer receive as a result your execution of the LOT? Potentially a lot. LOTs generally waive–explicitly or by reasonable implication–an employee’s right to the “appraisal rights” that Delaware and/or California law otherwise provide. Appraisal rights enable a shareholder to receive a judicial determination as to the true value of the shares sold in the M&A transaction. A shareholder who believes the price being paid was less than what the shares were really worth may commence an appraisal proceeding and receive fair value for their equity. So by drafting an LOT that waived these rights, the buyer in the transaction was able to pay less than what your shares were really worth.
Restitution Of Equity Compensation And/Or Appraisal Rights As A Remedy Under The UCL
The UCL’s remedy of restitution–which requires restoration of “any interest in money or property … acquired by means of unfair competition”–would arguably allow you, as a selling shareholder, to restoration of your appraisal rights and/or the underlying stock that the buyer in the M&A deal acquired through the LOT. This may not be relevant or appealing if your former employer was acquired at a price that history judges as fair or even too high. But, if hindsight suggests that the per-share price the acquirer paid was low relative to the value the company delivered after closing (e.g. eBay-PayPal, Google-YouTube, Facebook-Instagram, EMC-VMware) then you may have a potentially very valuable claim.
Moreover, and without getting too deep in the weeds, it’s likely that both the acquired company and the buyer acquired something as a result of the business practice and would both be liable for violating Labor Code Section 206.5 (which applies to every “employer”). California courts take a very broad view of what constitutes an “employer” and the term often includes any person or entity with the ability to hire or fire an individual. Standard M&A agreements provide the buyer with the ability to dictate whether certain employees are terminated prior to the closing date. Agreements generally also have a period of time in between the date they are signed and when they are finalized during which certain conditions must be fulfilled. The agreements almost always require that the seller get the buyer’s consent before it hires or fires employees during this period. As a result, the buyer in the M&A transaction was likely your “employer” at the time the LOT was signed and therefore liable to the same extent the seller is under the Labor Code and the UCL.
Legal Assistance
If you signed an LOT in connection with an M&A transaction, please feel free to contact Sebastian Miller Law with questions about the rights you may have. Although the law is uncertain in this area, the potential upside for former employees is substantial and worth pursuing–particularly given that the applicable statute of limitations is four-years long.
Disclaimer: All materials have been prepared for general information purposes only to permit you to learn more about Sebastian Miller Law, P.C, its services and experience. The information presented is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice.