Appellate justices have reversed Madison County Circuit Judge Daniel Stack who had granted summary judgment to a company targeted by employees claiming their stock options were worthless.
Lead class plaintiff Brian E. Wilgus, a former PaylinX employee, filed the complaint against CyberSource in 2002 after he says he and about 75 other former PaylinX employees were not allowed to immediately exercise their rights to buy shares of stock after PaylinX’s merger with CyberSource.
Wilgus, represented by KoreinTillery, had appealed Stack’s Jan. 21, 2008, order which held that class members were not entitled to their breach of contract complaint.
Wilgus had claimed that in the merger agreement between PaylinX and Cybersource, Cybersource agreed to assume all PaylinX employee stock options, which would then become options to buy Cybersource’s stock.
According to Wilgus, employees learned there was a blackout period during which they were not allowed to trade company stock in order to reduce the risk of insider trading.
After the blackout period ended, employees were supposed to be given packets instructing them on how to administer their E-trade accounts.
They claimed that by the time they received information packets, CyberSource stock had dropped from $10.75 per share at the time of the merger to $1.85 per share.
“By the time plaintiffs received the information about how to set up their E*Trade accounts and the blackout was lifted, the stock was virtually worthless to plaintiffs,” wrote Fifth District Appellate Court Justice Richard Goldenhersh in an opinion issued last week.
Wilgus and the class claimed they never should have been subjected to a blackout period because PaylinX stock was not traded on the open market.
After years of discovery, CyberSource moved for a summary judgment on the basis that its sole responsibility was to provide the plaintiffs with the opportunity to buy shares of stock and that it did not breach a contract with the plaintiffs.
Stack had agreed with CyberSource, ruling that all proposed evidence the plaintiffs entered was hearsay statements and parole evidence, which he said were misapplied. Neither hearsay nor parole evidence is admissible unless the hearsay evidence can be attributed to someone against whom the defendant could be held responsible or unless the parole evidence regards allegations of ambiguity or fraud, Stack wrote in his opinion.
In addition, the plaintiffs did not attempt to exercise their stock options, Stack wrote.
“What appears by the allegations of the plaintiff, even when all taken as true for purposes of this motion, is that the plaintiff discovered, after the fact, that he could have exercised those stock options at a lower price and subsequently resold the stock at a nice profit (hindsight is almost always 20/20),” Stack wrote.
But the appellate court disagreed, ruling that Stack misapplied the hearsay rule and parole evidence rule.
There should have been no blackout period because PaylinX was not a publicly traded stock, Goldenhersh wrote.
“We agree with plaintiffs that the imposition of the blackout by defendant only serves to create further factual questions for the jury,” he wrote.
“There is a question whether defendant breached the contract by improperly imposing a trading blackout on plaintiffs. Was the blackout imposed by defendant a legitimate business practice, or was it imposed to prevent plaintiffs from exercising their options and trading their shares on the open market, thereby devaluing defendant’s stock further?”
In his decision to grant a summary judgment, Stack said e-mails and depositions were inadmissible hearsay and parole evidence.
But, the appellate court found the evidence admissible.
“As plaintiffs point out, the terms and validity of the contract are not in dispute and are contained within the four corners of the documents,” Goldenhersh wrote.
“What is in dispute is the performance of the contract and whether defendant breached the contract by failing to make the options exercisable in full on or before the merger. Such evidence cannot be found within the four corners of the documents, but within the conduct of the parties; thus, the e-mails, affidavits, and depositions are admissible.”
In addition, Madison County Circuit Court looked at an affidavit and attached documents regarding the options of Robert Stockton when it issued its opinion, Goldenhersh wrote.
“To allow some evidence and disregard other evidence on the basis of a hearsay violation or parol evidence violation constituted reversible error,” he wrote.
Justices Melissa Chapman and Bruce Stewart concurred.
Appellate Court case number: 5-08-57.