VMware, Inc. v. Michael J. Wood ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
VMWARE, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2022-0820-PAF
)
MICHAEL J. WOOD, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: February 17, 2023
Date Decided: May 16, 2023
Elena C. Norman, Elisabeth S. Bradley, YOUNG CONAWAY STARGATT &
TAYLOR, LLP, Wilmington, Delaware; Arturo J. González, Shaelyn K. Dawson,
Camille Framroze, Meredith L. Angueira, MORRISON & FOERSTER LLP, San
Francisco, California; Attorneys for Plaintiff VMware, Inc.
Kasey H. DeSantis, Nathan D. Barillo, FOX ROTHSCHILD LLP, Wilmington,
Delaware; Neil A. Capobianco, FOX ROTHSCHILD LLP, New York, New York;
Attorneys for Defendant Michael J. Wood.
FIORAVANTI, Vice Chancellor
A former employee of VMware, Inc. (“VMware” or the “Company”)
contends that he is owed shares of VMware common stock following his resignation
from the Company. The former employee claims that when VMware acquired his
former employer, Velocloud Networks, Inc. (“Velocloud”), in a 2017 merger,
VMware was required to substitute unvested shares of VMware stock in exchange
for his unvested restricted shares of Velocloud stock and to either repurchase or
deliver the shares upon his termination from the Company. After the former
employee (the defendant and counterclaim plaintiff here) resigned from VMware,
the Company did not repurchase the shares and did not deliver VMware stock
certificates to him.
The former employee initially commenced litigation in California. The
California court stayed that action, having accepted the Company’s argument that
the claims must be litigated in Delaware. Thereafter, the Company filed its
complaint in this action against its former employee, seeking a declaratory judgment
that his unvested Velocloud shares were canceled in the merger and that VMware
owes him no additional consideration relating to those shares. The former employee
has filed counterclaims seeking an order requiring VMware to issue a certificate for
3,086 shares of VMware common stock and related relief.
The Company has moved to dismiss the former employee’s counterclaims and
for summary judgment on its declaratory judgment claim. The former employee has
moved for partial summary judgment on his claims for breach of contract and
specific performance. Under the plain and unambiguous terms of the contracts at
issue, the former employee’s shares of unvested Velocloud stock were canceled in
the merger in exchange for a stream of 17 monthly cash payments. VMware’s
obligation to make those payments ended when the former employee resigned from
his employment with VMware after receiving only eight of those payments.
Therefore, the court grants the Company’s motions and denies the former
employee’s motion.
I. BACKGROUND1
A. Velocloud Issues a Stock Option to the Defendant.
Before it was acquired by VMware in 2017, Velocloud was a privately held
startup technology company.2 Velocloud hired Defendant Michael J. Wood as its
Vice President of Marketing on May 11, 2015.3 In connection with his hiring at
Velocloud, Wood was given the opportunity to acquire equity in Velocloud under
its Amended and Restated 2012 Stock Plan (the “Plan”).4
1
The facts are derived from the pleadings and documents integral thereto. Dkts. 1, 13.
Exhibits attached the Complaint are cited as “Ex.”
2
Compl. ¶ 16; Answer ¶ 16.
3
Compl. ¶ 20; Answer ¶ 20.
4
Dkt. 42 (“Plan”).
2
On June 30, 2015, Velocloud awarded Wood an option to acquire 230,000
shares of Velocloud common stock. The award is documented in a “Stock Option
Agreement—Early Exercise” between Wood and Velocloud (the “Option
Agreement”).5 At the time of the Option Agreement, the shares underlying the
option were unvested.6 The Option Agreement provided that the shares would vest
over a five-year period.7
The Option Agreement contained an early exercise feature, allowing Wood to
exercise the option and acquire shares before they vested.8 Wood took advantage of
the early exercise feature, and on October 1, 2015, exercised the option to purchase
208,330 shares of Velocloud common stock, none of which were vested.9
Wood executed several documents in connection with his October 1, 2015
option exercise. The first is an exercise notice (the “Exercise Notice”).10 The
Exercise Notice reflects that Wood exercised his option to purchase 208,330
shares.11 The Exercise Notice confirms that the underlying shares would contain
legends indicating that the shares were restricted and had not been registered under
5
Compl. ¶ 21; Answer ¶ 21; Ex. C at Ex. 1 (“Option Agreement”).
6
Compl. ¶ 23; Answer ¶ 23.
7
Option Agreement § I.
8
Id. § II(2).
9
Compl. ¶¶ 22–23; Answer ¶¶ 22–23.
10
Option Agreement at Ex. A (“Exercise Notice”).
11
Id. § 1.
3
the Securities Act of 1933 (the “Securities Act”).12 Second, Wood executed an
Investment Representation Statement, which again acknowledged that the 208,330
shares he was purchasing were restricted securities under the Securities Act.13
Third, Wood executed a restricted stock purchase agreement for his 208,330
shares (the “RSPA”).14 The RSPA provided that if Wood’s employment with
Velocloud was terminated, “the Company shall have the right and option for ninety
(90) days from such date to purchase from Purchaser . . . all of [Wood’s] Unvested
Shares as of the date of such termination at the price paid by the Purchaser for such
Shares (the ‘Repurchase Option’).”15 “If the Company does not elect to exercise the
Repurchase Option . . . by giving the requisite notice within ninety (90) days
following the termination, the Repurchase Option shall terminate.”16 The RSPA
defines “Unvested Shares” as “208,330 of those of shares of Common Stock which
have not become vested under the vesting schedule set forth in the Option
Agreement.”17
12
Id. § 7(a).
13
Option Agreement at Ex. B.
14
Option Agreement at Ex. C-1 (“RSPA”).
15
Id. § 1(a).
16
Id. § 1(d).
17
Id. at 1.
4
Wood also executed an assignment (the “Assignment”)18 and joint escrow
instructions (“Escrow Instructions”).19 Those documents essentially assign Wood’s
restricted shares to the Company so as to facilitate the Company’s ability to exercise
its Repurchase Option of Wood’s unvested shares under the terms of the RSPA. The
Escrow Instructions provide in pertinent part that “[w]ithin one hundred and twenty
(120) days after cessation of [Wood’s] continuous employment by or services to the
Company . . . [the Company] shall deliver to [Wood] a certificate or certificates
representing the aggregate number of shares held or issued pursuant to the
Agreement and not purchased by the Company . . . pursuant to exercise of the
Company’s repurchase option.”20
B. VMware Acquires Velocloud.
On November 1, 2017, Velocloud entered into a Merger Agreement with
VMware (the “Merger Agreement”), under which Velocloud agreed to be acquired
by VMware, a publicly traded company, in an all-cash deal.21 On November 5, 2017,
Wood entered into an employment agreement with VMware, effective upon the
closing of the merger.22 The merger closed on December 12, 2017, resulting in
18
Option Agreement at Ex. C-2 (“Assignment”).
19
Option Agreement at Ex. C-3 (“Escrow Instructions”).
20
Id. § 4.
21
Compl. ¶ 25; Answer ¶ 25; Ex. A (“Merger Agreement”).
22
Ex. E.
5
Velocloud becoming a wholly owned subsidiary of VMware. The treatment of
Wood’s Velocloud equity and stock option in the merger is central to the claims in
this case.
Immediately prior to the merger, Wood held three types of equity securities
in Velocloud. First, Wood continued to hold an unexercised option to purchase the
remaining 21,670 shares of Velocloud common stock under the 2015 Option
Agreement. Next, Wood held shares of common stock in Velocloud pursuant to the
October 2015 exercise of his option. Of the 208,330 shares of common stock that
he had purchased in October 2015, 148,541 shares had vested and 59,789 shares
remained unvested.
The Merger Agreement explained how Velocloud securities would be treated
in the merger.
1. Unexercised Options
Section 1.6(a) of the Merger Agreement addressed the treatment of
unexercised Velocloud stock options. Vested, in-the-money options would be
canceled in exchange for a cash payment.23 Wood did not hold any such option.
Under Section 1.6(a)(2), any portion of any Velocloud option that was
unvested and exercisable at a per share price less than the per share merger
consideration (approximately $11.74) would be converted into an option to purchase
23
Merger Agreement § 1.6(a)(1).
6
a proportional number of shares in VMware common stock.24 In accordance with
Section 1.6(a)(2), on November 8, 2017 (before the closing of the merger), Wood
and Velocloud entered into an Option Consent and Substituted Option Agreement
(the “Substituted Option Agreement”).25
Consistent with the Merger Agreement, the Substituted Option Agreement
distinguished between the treatment of vested and unvested portions of Velocloud
options in the merger. Portions of any in-the-money option that had vested would
be converted into the right to receive cash, based on a specified formula.26 The
treatment of any portion of an unvested Velocloud option would depend on the
option holder’s status after the closing of the merger. If the option holder continued
on as an employee or service provider of VMware or its subsidiaries (including
Velocloud), VMware would “substitute an option to purchase shares of [VMware]
Common Stock (a ‘Substitute Option’).”27 The Substituted Option Agreement
provided that “[e]ach Substitute Option will contain the same material terms and
conditions as were applicable to such [Velocloud] Option as of immediately prior to
24
Id. § 1.6(a)(2) (“Parent shall . . . substitute the portion of any Company Option that was
unvested immediately prior to the Effective Time, has been issued to a Continuing
Employee and is exercisable for an exercise price less than the Per Share Consideration . .
. with an option to acquire, on the same material terms and conditions as were applicable
to such Rollover Option as of immediately prior to such substitution by Parent.”).
25
Ex. C at Ex. 2 (“Substituted Option Agreement”).
26
Id. at 2–3.
27
Id. at 3–4.
7
such substitution” subject to certain exceptions not implicated here.28 Under the
Substituted Option Agreement, Wood received a new option to purchase 2,110
shares of VMware common stock in exchange for relinquishing his rights to the
21,670 remaining unvested Velocloud shares underlying the 2015 Option
Agreement. The VMware shares underlying the substituted option vest on the same
schedule as contained in Wood’s 2015 Option Agreement.29 Wood has not
attempted to exercise his option in VMware, and there is no dispute between the
parties about the treatment of this portion of Wood’s Velocloud securities.
2. Vested Common Stock
Under Section 1.4 of the Merger Agreement, nearly all vested shares of
Velocloud common stock30 would be canceled and would be converted into the right
to receive $11.73952 per share.31 On December 11, 2017, Wood executed a Letter
of Transmittal providing for the surrender of his vested shares of Velocloud stock
28
Id. at 4.
29
Id.
30
There are certain exceptions as to stock held by VMware and its affiliates, which are not
pertinent here.
31
Merger Agreement § 1.4(c) (“Each share of Company Capital Stock (other than the
Canceled Shares, shares of Company Restricted Stock and Dissenting Shares) issued and
outstanding immediately prior to the Effective Time will be converted into the right to
receive . . . an amount of cash (without interest) equal to the Per Share Consideration.”).
“Company Restricted Stock” is defined as unvested Velocloud common stock. Id. § 1.8 at
90.
8
and payment for those shares in the merger.32 In the Letter of Transmittal, Wood
agreed that he “shall be bound by the provisions of the Merger Agreement.”33
Following consummation of the merger, Wood received $1,743,799.59 in cash in
exchange for his 148,541 vested shares in Velocloud.34 There is no dispute between
the parties about the treatment of this portion of Wood’s Velocloud securities.
3. Unvested Common Stock
Section 1.6(b) of the Merger Agreement addresses the treatment of unvested
shares of Velocloud common stock. The pertinent subsection for continuing
employees, like Wood, is Section 1.6(b)(1). It provides:
[E]ach holder of Company Restricted Stock that is a Continuing
Employee (each a “Continuing Restricted Stock Holder”) will enter
into an installment agreement in the form attached hereto as exhibit G
(the “Restricted Stock Installment Agreement”), pursuant to which,
contingent upon the consummation of the Merger, each share of
Company Restricted Stock issued and outstanding immediately prior to
the Effective Time held by such Continuing Restricted Stock Holder
will automatically be canceled and will cease to exist, and such
Continuing Restricted Stock Holder will cease to have any rights with
respect thereto, except the right to receive, on the condition that such
holder enters into the Restricted Stock Installment Agreement, an
amount (without interest) per share of Company Restricted Stock equal
to the Per Share [Merger] Consideration, such amount to be payable in
accordance with the terms and conditions of such holder’s Restricted
Stock Installment Agreement.35
32
Compl. ¶ 36; Answer ¶ 36; Dkt. 25 at Ex. 8.
33
Dkt. 25 at Ex. 8.
34
Compl. ¶ 43; Answer ¶ 43.
35
Merger Agreement § 1.6(b)(1).
9
Pursuant to Section 1.6(b)(1), Wood entered into a Restricted Stock
Installment Agreement (the “RSI”) with VMware on December 12, 2017.36 Wood’s
RSI provided for 17 monthly payments of $41,287.88, beginning on January 1, 2018
and ending on May 1, 2019, which tracked the vesting schedule in the original
Option Agreement.37
Section 1(b) of the RSI, titled “Termination” provides:
Parent’s obligation to make future installment payments under this
Section 1 will automatically terminate on the date on which Holder’s
Continuous Service terminates (the “Service Termination Date”), and
Holder will automatically forfeit any unpaid portion (other than
amounts that are earned and past due) of the Restricted Stock
Installment Consideration (such unpaid portion other than amounts past
due, the “Forfeited Amount”), except that Parent will pay to Holder
promptly after such Service Termination Date an amount equal to the
(i) (A) the Forfeited Amount divided by (B) the Per Share
Consideration, multiplied by (ii) the purchase price per share that
Holder paid for the shares of the Company Restricted Stock that
correspond to the Forfeited Amount.38
Beginning in January 2018, Wood began to receive monthly cash payments
of $41,287.88 pursuant to the RSI.39 On August 13, 2018, Wood voluntarily
resigned from VMware.40 Thereafter, VMware stopped sending monthly payments
36
Ex. B (“RSI”).
37
Id. at Ex. A.
38
RSI § 1(b).
39
Compl. ¶ 45; Answer ¶ 45.
40
Compl. ¶ 46; Answer ¶ 46.
10
to Wood. In December 2018, VMware sent Wood $15,193.44, which it contends is
the amount owed to him under the formula in Section 1(b)(i) and (ii) of the RSI.41
C. California Action
On December 13, 2021, Wood filed an action against VMware in the Superior
Court of the State of California, County of Santa Clara (the “California Action”).42
The California Action asserted a variety of claims against VMware, including for
breach of contract and specific performance. Wood alleged that VMware owed him
3,086 shares of VMware Class A common stock because it failed to exercise its
Repurchase Option under the RSPA following the termination of Wood’s
employment.43 VMware moved to stay or dismiss the California Action, arguing
that Wood was required to litigate his claims in Delaware under the exclusive forum
provisions in the Merger Agreement and RSI.44 The California court concluded that
that “any claim that [Wood] may have as to unvested shares in Velocloud common
stock can only be brought under the Merger Agreement and Restricted Stock
41
Compl. ¶ 46; Answer ¶ 46.
42
Compl. ¶ 47; Answer ¶ 47; Ex. C.
43
Ex. C ¶¶ 15–16, 21.
44
Ex. D at 2.
11
Installment Agreement.”45 The court stayed the California Action until this action
is concluded.46
D. Procedural History
On September 16, 2022, VMware filed its verified complaint in this action.47
VMware seeks an order declaring that Wood is not entitled to recover any further
consideration for his unvested shares of Velocloud common stock. On October 24,
2022, Wood answered the complaint and asserted seven counterclaims against
VMware.48 Wood’s counterclaims include claims for breach of contract, breach of
the implied covenant of good faith and fair dealing, promissory estoppel, specific
performance, violations of the California labor code, unfair competition, and
conversion. Wood argues that, based on his calculations, he is entitled to 3,086
shares of VMware common stock due to VMware’s failure to exercise its
Repurchase Option in the RSPA, which Wood argues is incorporated into the RSI.
Each of Wood’s counterclaims turns on the question of whether Wood is entitled to
VMware stock.
45
Id.
46
Id. at 3.
47
Dkt. 1.
48
Dkt. 13.
12
Wood has moved for partial summary judgment on his breach of contract and
specific performance claims.49 VMware has moved to dismiss Wood’s
counterclaims and seeks summary judgment on its declaratory judgment claim.50
The court heard argument on February 16, 2023, and received additional materials
from the parties on February 17.
II. ANALYSIS
A. The Standards of Review
Under Court of Chancery Rule 12(b)(6), a complaint may be dismissed for
failure to state a claim if the claimant “could not recover under any reasonably
conceivable set of circumstances susceptible of proof.” Central Mortg. Co. v.
Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). Under
Court of Chancery Rule 56, summary judgment is appropriate when “there is no
genuine issue as to any material fact and . . . the moving party is entitled to judgment
as a matter of law.” Ct. Ch. R. 56.
All three pending motions concern the same question: Is Wood entitled to
3,086 shares of VMware common stock? Thus, the court is called upon to construe
the parties’ contracts.
49
Dkt. 14.
50
Dkts. 18, 23–25.
13
The correct construction of a contract is a question of law. Exelon Generation
Acqs., LLC v. Deere & Co., 176 A.3d 1262, 1266–67 (Del. 2017). “Delaware law
adheres to the objective theory of contracts, i.e., a contract’s construction should be
that which would be understood by an objective, reasonable third party.” Osborn ex
rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010). The court will construe the
contract as a whole and attempt to give effect to all of its provisions. Sunline Com.
Carriers, Inc. v. CITGO Petrol. Corp., 206 A.3d 836, 836 (Del. 2019). “Contract
terms themselves will be controlling when they establish the parties’ common
meaning so that a reasonable person in the position of either party would have no
expectations inconsistent with the contract language.” Eagle Indus., Inc. v.
DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997). Where, as here, the
case turns on the interpretation of a contract, dismissal or summary judgment is
appropriate only if the contract in question is unambiguous. Vanderbilt Income &
Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 613 (Del.
1996); GMG Cap. Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 783
(Del. 2012). “A contract is not rendered ambiguous simply because the parties do
not agree upon its proper construction. Rather, a contract is ambiguous only when
the provisions in controversy are reasonably or fairly susceptible of different
interpretations or may have two or more different meanings.” Rhone-Poulenc Basic
Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992).
14
B. Wood’s Theory Ignores the Unambiguous Language of the
Agreements.
Wood’s legal theory is cobbled together from provisions in several different
agreements spanning several years. To begin the analysis, it is helpful to recap what
Wood held before the merger and what he received in the transaction.
Immediately prior to the merger, Wood held three types of securities in
Velocloud: vested common stock, unvested common stock, and a stock option. In
the merger, Wood’s vested common stock was cashed out for approximately $1.7
million, and his unexercised option to purchase 21,670 shares of Velocloud common
stock was replaced with an option to purchase 2,110 shares of VMware common
stock.51 There is no dispute about that. The subject of Wood’s claim is the 59,789
shares of Velocloud common stock that Wood purchased in October 2015 which had
not yet vested as of the effective date of the merger. Wood makes several
inconsistent arguments as to how those unvested shares were or should have been
treated in the merger.
Wood’s theory goes as follows: First, he claims that those 59,789 unvested
shares of Velocloud restricted stock were converted into an option to purchase
unvested VMware shares pursuant to the Substituted Option Agreement, using the
51
There is no allegation that this option has been exercised.
15
exchange ratio therein.52 Second, Wood asserts that the stream of monthly payments
under the RSI “represented the ongoing monthly vesting and payout of Mr. Wood’s
previously unvested VMware options that had been substituted for Mr. Wood’s
unvested early-exercised VeloCloud options.”53 Third, after receiving eight monthly
payments under the RSI, Wood resigned from VMware, forgoing the remaining 9
months of installment payments. Wood then takes the total amount of that forgone
payment stream and converts it into an equivalent number of VMware options, based
on the conversion ratio in the Substituted Option Agreement.54 Wood calculates this
to be 3,086 VMware shares.55
Next, Wood contends that the 3,086 shares were subject to Velocloud’s
Repurchase Option contained in the RSPA. If Velocloud did not exercise its right
to repurchase the Wood’s unvested shares within 90 days from the date that his
employment terminated, Velocloud would be obliged to deliver to Wood a share
52
Def.’s Opening Br. 6, 8.
53
Id. at 8.
54
Counterclaim Compl. ¶ 28.
55
Wood applies the exchange ratio to his 59,789 unvested shares of Velocloud stock and
concludes that he was owed 5,822 shares of VMware common stock. He then reduces that
figure by accounting for the eight months of RSI payments that he received, which adjusts
the number of shares he demands to 3,086. See Counterclaim Compl. ¶ 28; Def.’s Opening
Br. 9.
16
certificate for each of Wood’s unvested shares.56 Wood argues that, but virtue of the
merger, VMware assumed that obligation through the Substituted Option
Agreement. Thus, Wood claims entitlement to “3,086 unrestricted VMware
shares.”57
Wood’s theory is flawed in several respects. First and fundamentally, it
conflates options with stock. Throughout his Counterclaim Complaint and briefs,
Wood refers to the 59,789 unvested shares of Velocloud stock that he owned
immediately before the closing of the merger as early exercised unvested options.58
In doing so, he seeks to have his unvested stock treated the same as his unvested
options under the Substituted Option Agreement, while still possessing the right to
a repurchase or delivery of shares under the RSPA and Escrow Instructions. The
court cannot accept Wood’s tortured reading of the agreements and ignore their plain
and unambiguous terms. See AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del. 2008)
(“Courts will not torture contractual terms to impart ambiguity where ordinary
meaning leaves no room for uncertainty.”).
56
Id. The Repurchase Option is contained in the RSPA. RSPA § 1. The obligation to
deliver shares in the event the Repurchase Option is not timely exercised is contained in
the Escrow Instructions. Escrow Instructions § 4.
57
Counterclaim Compl. ¶ 32.
58
See, e.g., Def.’s Opp’n Br. 10; Counterclaim Compl. ¶ 28.
17
The Substituted Option Agreement provided for the substitution of VMware
options for Velocloud options. It states: “Each Substitute Option will contain the
same material terms and conditions as were applicable to such [Velocloud] Option
as of immediately prior to such substitution.”59 The Substituted Option Agreement
covers Wood’s unexercised options, not his unvested stock. A stock option is “[a]n
option to buy or sell a specific quantity of stock at a designated price for a specified
period regardless of shifts in market value during the period.” Stock Option, Black’s
Law Dictionary (11th ed. 2019). “Options are not shares.” Fox v. CDX Hldgs., Inc.,
2015 WL 4571398, at *35 (Del. Ch. July 28, 2015), aff’d, 141 A.3d 1037 (Del.
2016). Once Wood exercised his option to purchase 208,330 shares of unvested
Velocloud common stock in October 2015, no option remained outstanding as to
those shares. The Plan confirms this. “Exercising an Option in any manner will
decrease the number of shares thereafter available . . . for sale under the Option, by
the number of Shares as to which the Option is exercised.”60 Wood’s 59,789
unvested shares of Velocloud stock were no longer eligible for purchase under the
Option Agreement because he had already exercised and purchased the shares in
2015. Wood was not entitled to a substitute option for those shares because the
scope of the Substituted Option Agreement is confined to “the treatment of
59
Substituted Option Agreement at 4.
60
Plan § 6(f)(i).
18
outstanding options to purchase shares of the Company’s common stock.”61 The
Substituted Option Agreement did not affect the treatment of Wood’s 59,789
unvested shares of Velocloud common stock.62
VMware was also not required to either repurchase or deliver Wood’s
unvested shares under the Repurchase Option and Escrow Instructions. Wood’s
unvested Velocloud stock was canceled in the merger in exchange for a payment
stream under the RSI. The RSI provides that “[f]or each share of Company
Restricted [i.e., unvested] Stock held by Holder [i.e., Wood], Holder will become
eligible to receive an amount (without interest) equal to the Per Share
Consideration.”63 Under the terms of the agreement, Wood agreed to surrender his
unvested Velocloud stock in exchange for a stream of cash to be paid in monthly
installments. In Wood’s case, those monthly installments were $41,287.88 from
January 1, 2018 through May 1, 2019.64 The agreement states that VMware’s
“obligation to make future installment payments . . . will automatically terminate on
the date on which Holder’s Continuous Service terminates (the ‘Service Termination
61
Substituted Option Agreement at 1 (emphasis added); see also id. at 5 (“I agree to the
treatment of my Company Options as described in this consent and agreement.”).
62
As noted earlier, Wood’s outstanding option to purchase 21,670 Velocloud shares was
eligible for substitute options under the Substituted Option Agreement. Under that
agreement, Wood received a substituted option to purchase 2,110 shares of VMware stock.
There is no claim in this case about that option.
63
RSI at 1.
64
Id. at Ex. A.
19
Date’), and Holder will automatically forfeit any unpaid portion . . . of the Restricted
Stock Installment Consideration.”65 The RSI’s unambiguous terms provide that
Wood’s unvested Velocloud shares would be canceled in exchange for a right to
receive regular cash payments that would be terminated if Wood stopped working
for VMware before all payments were made. Section 1.6(b)(1) of the Merger
Agreement, to which Wood expressly agreed to be bound,66 confirms this result:
[E]ach share of Company Restricted [i.e., unvested Velocloud] Stock
issued and outstanding immediately prior to the Effective Time held by
such Continuing Restricted Stock Holder will automatically be
canceled and will cease to exist, and such Continuing Restricted Stock
Holder will cease to have any rights with respect thereto, except the
right to receive, on the condition that such holder enters into the
Restricted Stock Installment Agreement, an amount (without interest)
per share of Company Restricted Stock equal to the Per Share
Consideration, such amount to be payable in accordance with the terms
and conditions of such holder’s Restricted Stock Installment
Agreement.67
Wood argues, however, that the RSI does not eliminate VMware’s obligation
to either repurchase or deliver his unvested shares under the Repurchase Option and
Escrow Instructions. Rather, Wood contends that these obligations were preserved
under the integration clause in the RSI. This argument fails.
65
RSI § 1(b).
66
Dkt. 25 at Ex. 8 § 5.
67
Merger Agreement § 1.6(b)(1).
20
The RSI’s integration clause states that it, “together with the Merger
Agreement and the other Transaction Agreements, constitutes the entire agreement
of the parties with respect to the subject matter of this agreement and supersedes all
prior and contemporaneous agreements . . . between the parties.”68 The 2015 RSPA
and Escrow Instructions are not among the documents within the defined term
“Transaction Agreements.” Although the Substituted Option Agreement is among
the Transaction Documents,69 it pertains only to “the treatment of outstanding
options to purchase shares,” not previously purchased stock.70 Even if there were
any conflict between the RSPA and the RSI, the RSI would control. “Delaware
recognizes that where a new, later contract between the parties covers the same
subject matter as an earlier contract, the new contract supersedes and controls that
issue, if the two agreements conflict.” Cabela’s LLC v. Wellman, 2018 WL
5309954, at *4 (Del. Ch. Oct. 26, 2018) (citing Country Life Homes, Inc. v. Shaffer,
2007 WL 333075, at *5 (Del. Ch. Jan. 31, 2007)). Thus, the RSI and the enumerated
Transaction Agreements control the treatment of Wood’s unvested Velocloud stock
in the merger, not the RSPA and Escrow Instructions.
68
RSI § 5(e).
69
See Merger Agreement, Ex. A-2 (“Joinder Agreement”); Counterclaim Compl. ¶ 22.
70
Substituted Option Agreement at 1.
21
Wood argues that VMware could not “cancel a right to equity that Mr. Wood
obtained when he received his stock option grant on June 30, 2015.”71 But Wood
offers no legal support for this argument and ignores that he voluntarily executed the
RSI on December 12, 2017. That agreement, which incorporates the Merger
Agreement, provided for the cancelation of Wood’s unvested Velocloud shares in
exchange for a stream of cash payments.
Finally, Wood argues that if the terms under the RSI are substituted for
Wood’s rights under the Option Agreement and RSPA, then the RSI is not supported
by any consideration.72 This argument lacks merit. In order for a contract to be
valid, the parties must exchange legal consideration. Osborn ex rel. Osborn v. Kemp,
991 A.2d 1153, 1158 (Del. 2010). “Consideration for a contract can consist of either
a benefit to the promiser or a detriment to the promisee.” First Mortg. Co. of Pa. v.
Fed. Leasing Corp., 456 A.2d 794, 795–96 (Del. 1982) (citations omitted). “[I]f the
promisee parts with something at the promisor’s request, it is immaterial whether
the promisor receives anything.” Id. at 796 (citing 1 Williston on Contracts § 113
(3d ed. 1979)).
Consideration requires that each party to a contract convey a benefit or
incur a legal detriment, such that the exchange is “bargained for.” If
this requirement is met, there is no additional requirement of
71
Def.’s Opp’n Br. 4.
72
Id. at 7.
22
equivalence in the values exchanged because we limit our inquiry into
consideration to its existence and not whether it is fair or adequate.
Cox Commc’ns, Inc. v. T-Mobile US, Inc., 273 A.3d 752, 764 (Del. 2022) (internal
citations omitted).
Wood agreed to the cancellation of his unvested Velocloud shares in exchange
for a stream of cash payments governed by the terms of the RSI. This bargained-for
exchange serves as legal consideration for the RSI.
Wood’s reliance on Cigna Health & Life Ins. Co. v. Audax Health Sols., Inc.,
107 A.3d 1082, 1091 (Del. Ch. 2014), is misplaced. In Cigna Health, a stockholder
refused to agree to a release as a condition to the payment of merger consideration.
The release did not appear in the merger agreement and, instead, was contained in a
letter of transmittal delivered to stockholders after the closing of a merger. The court
held the release was unenforceable due to a lack of consideration. Id. The court
reasoned that “the Release Obligation [wa]s a new obligation Defendants seek to
impose on Cigna post-closing, and . . . nothing new [was] provided to Cigna beyond
the merger consideration to which it became entitled when the Merger was
consummated and its shares were canceled.” Id.Cigna Health is inapposite. Wood’s entry into the RSI was a condition to
VMware’s consummation of the merger,73 and Wood entered into the RSI before the
73
RSI at 1.
23
merger was consummated. Wood freely exchanged any right he had to the unvested,
restricted, and illiquid Velocloud shares for the new right to the payment stream in
the RSI. In doing so, he also avoided transaction costs associated with any future
sale of that stock. See Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 2000 WL
1476663, at *15 (Del. Ch. Sept. 27, 2000) (recognizing that an offer may benefit
unitholders with small blocks of equity when it offers them liquidity without the
obligation to pay brokerage fees); Applebaum v. Avaya, Inc., 805 A.2d 209, 216
(Del. Ch. 2002) (noting that the fact that “[t]he cash payment made for shares will
not be reduced to reflect transaction costs which, in a regular sale, would amount to
a significant portion of the total proceeds of sale” supports an argument of fair price).
Wood’s argument against the enforceability of the RSI also fails because he
accepted eight months of cash payments under its terms. Having accepted the
benefits of the RSI, he cannot now claim it is unenforceable due to a lack of
consideration. See In re Mobilactive Media, LLC, 2013 WL 297950, at *14 (Del.
Ch. Jan. 25, 2013) (“By continuing to accept the benefits of the contract, however,
Silverback essentially admitted to its validity, and is estopped from arguing
voidability.”); DeMarie v. Neff, 2005 WL 89403, at *5 (Del. Ch. Jan. 15, 2005)
(“[T]he nonbreaching party may not, on the one hand, preserve or accept the benefits
of a contract, while on the other hand, assert that contract is void and
unenforceable.”). The RSI is supported by consideration and is enforceable.
24
Under the plain language of the RSI and Merger Agreement, Wood is not
entitled to 3,086 shares of VMware common stock. In entering into the RSI and
binding himself to the Merger Agreement, Wood accepted that his unvested
Velocloud stock would be canceled and that he would be entitled to a monthly cash
payment that would be terminated if Wood ceased his employment with VMware.
As such, Plaintiff’s motion for summary judgment on its claim for declaratory
judgment is granted, and Defendant’s motion for partial summary judgment as to his
breach of contract and specific performance claims is denied.
C. Motion to Dismiss
Wood has asserted counterclaims for breach of contract, breach of the implied
covenant of good faith and fair dealing, promissory estoppel, specific performance,
violations of the California labor code, unfair competition, and conversion. VMware
has moved to dismiss each of Wood’s seven counterclaims for failure to state a
claim.
Count I, the breach of contract claim, alleges that VMware breached the RSPA
and Substituted Option Agreement by failing to deliver to Wood 3,086 shares of
VMware common stock. Count II alleges that VMware’s failure to deliver the stock
“was wrongful, in bad faith, arbitrary and unfair, and therefore breached the
covenant of good faith and fair dealing.”74 Count III alleges in the alternative that if
74
Counterclaim Compl. ¶ 43.
25
the contractual agreement “regarding the equity grant is found to be invalid,
VMware is nevertheless liable under the doctrine of promissory estoppel.”75 Count
IV seeks specific performance requiring VMware to deliver 3,086 shares of VMware
common stock to Wood. Count V alleges that VMware violated the California labor
code because the VMware stock to which Wood claims entitlement constituted
wages. Count VI contends that VMware’s actions and conduct constitute unlawful,
unfair, and fraudulent business practices because VMware has been deprived Wood
of property and benefits (i.e., VMware stock) that Wood believes he was owed.
Count VII is a claim for conversion of the VMware stock to which Wood claims
entitlement.
Each of Wood’s counterclaims rises or falls on the question of Wood’s
entitlement to VMware stock. Wood does not argue otherwise. As discussed above,
under the unambiguous language of the contracts at issue in this case, Wood is not
entitled to receive any shares of common stock in VMware. Therefore, each of his
seven counterclaims must be dismissed.
III. CONCLUSION
Plaintiff’s motion for summary judgment is granted, and Defendant’s motion
for partial summary judgment is denied. Plaintiff’s motion to dismiss Wood’s
counterclaims is granted in its entirety.
75
Id. ¶ 48.
26