The opinion of the court was delivered by: Irenas, Senior District Judge
Plaintiff commenced this class action on October 21, 2005, alleging breach of contract. The Court has jurisdiction over this case pursuant to 28 U.S.C. § 1332, and over the class members pursuant to 28 U.S.C. § 1332(d).
Plaintiff moves to certify class and to appoint himself as the lead plaintiff. For the reasons set forth below, the Motion will be granted.
Plaintiff ("Barr") was the former CEO of Caesars' Entertainment Inc. ("Caesars") until Defendant Harrah's Entertainment, Inc. ("HET") acquired Caesars. On July 14, 2004, Caesars entered into a merger agreement (the "Merger Agreement") with HET and Harrah's Operating Company ("HOC"), a wholly owned subsidiary of HET. (Pl. Ex. A). On March 11, 2005, Caesars' stockholders voted in favor of the Merger Agreement. (Pl. Ex. B). Caesars merged with and into HOC on June 13, 2005 (the "Merger").
Barr was a holder of options granted by Caesars to purchase its common stock. He asserts that he and other option holders were not paid for the full value of their options as provided by the terms of the plan pursuant to which the options were issued by Caesars when the payment for the options became due.
Pursuant to § 2.01 of the Merger Agreement, Ceasars' shareholders had the right to elect to receive either $17.75 (the "cash option") or up to 0.3247 of a share of HET common stock (the "exchange option") for each share of Caesars' common stock. The rate at which Caesars' common stock is converted into HET's common stock is the "Exchange Ratio," which was subject to a proration schedule in § 2.01(e) of the Merger Agreement. Under the proration schedule, a higher percentage of Caesars' shareholders electing the exchange option leads to a smaller Exchange Ratio.
Ultimately, 97.35% of Caesars' shareholders elected the exchange option. Under the proration schedule, these shareholders would receive 0.2212 of a share of HET common stock plus $5.66 for each share of Caesars common stock. On June 13, 2005, the closing date of the Merger, HET stock traded at $73.17 per share. Accordingly, Caesars' shareholders who elected the exchange option received $21.85 per share for their stock.*fn1
Section 2.04(c) of the Merger Agreement provided for the treatment of Caesars' Restricted Stock Units ("RSUs"). Caesars' 2004 Long Term Incentive Plan (the "2004 Plan") permitted RSU holders to receive Caesars' common stock or cash upon the vesting of their RSUs. (Pl. Ex. C). The 2004 Plan also states that RSUs would become vested upon a change in control.
Section 2.04(e) of the Merger Agreement provides for the treatment of Supplemental Retention Units ("SRUs"). The Supplemental Retention Plan (the "SRU Plan") adopted by Caesars' predecessor, Park Place Entertainment, Inc. ("PPE"), created these SRUs. (Pl. Ex. D). The SRU Plan permitted Caesars' senior executives to receive SRUs which were convertible into a share of Caesars' common stock upon vesting. All unvested SRUs would become vested upon a change in control as defined in Article 2 of the SRU Plan. (Id.).
The Merger Agreement provided that the RSUs and SRUs would vest on the date of the Merger and be exchanged for HET common stock. The Merger Agreement also exempted these units from the proration schedule, and allowed them to be exchanged for HET common stock at the Exchange Ratio of 0.3247. Calculated this way, each RSU or SRU had a value of $23.76, based on the closing price of HET common stock at the time of the Merger.
In 1998, PPE adopted the Park Place Entertainment Corporation 1998 Stock Incentive Plan (the "1998 Plan"), which was amended in part as of May 11, 2001. (Pl. Ex. E). The 1998 Plan was designed to compensate Caesars' officers and employees through the award of stock options. Pursuant to the Merger Agreement, HET assumed Caesars' obligation under the 1998 Plan. (Pl. Ex. F, No. 1).
Section 5(j) of the 1998 Plan contained a "Change in Control Cash-Out" provision that provided each option holder with the right to elect to surrender their options in exchange for a cash payment during the 60-day period following a "change in control" event. (Pl. Ex. E). This section also provided that the cash payment was an amount equal to the number of shares of options multiplied by the difference between the Change in Control Price (the "CCP") on the date of the election and the exercise price.
Section 7(c) of the 1998 Plan defined the CCP as:
(i) the highest reported sales price, regular way, of a share of [Caesars'] Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control, or (ii) if the Change in Control is the result of a tender or exchange offer or a Corporate Transaction, the highest price per share of Common Stock paid in such tender or exchange offer of Corporate Transaction.
After the Merger, HET calculated the cash payment for the option holders by using $21.85 as the CCP. (Pl. Ex. G, No. 2). HET calculated the cash payment "by multiplying the [CCP] of $21.85 times the number of options held, minus the exercise price in the option awards times the number of options awarded." (Id.). HET calculated the CCP of $21.85 by multiplying the closing price of HET stock on June 13, 2005, ($73.17) by 0.2211 (prorated Exchange Ratio) and adding $5.66. (Id.).
This formula was applied to every person who elected to receive cash for their options. Accordingly, on March 14, 2005, all option holders who elected to exchange their options for cash received an initial $20.89 payment for each share of option. On June 24, 2005, following consummation of the Merger, all option holders received a top-off payment that was intended to result in a payment equivalent to the CCP as defined by the 1998 Plan. The top-off payment was an additional $0.96 per share based on the final 0.2212 Exchange Ratio. In total, all option holders received a cash out price of $21.85 per share.
Barr claims that HET breached the 1998 Plan because the option holders were not awarded "the highest price per share of Common Stock paid in such tender or exchange offer of Corporate Transaction. . ." (Pl. Ex. E, § 7(c)). He argues that since holders of RSUs and SRUs were paid shares of HET common stock having a value of $23.76 for each share of Caesars' common stock, into which each RSU or SRU was convertible, the "highest price per share" should be $23.76.*fn2 This claim is the basis for this litigation.
Caesars retained Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden") in connection with the Merger. On February 4, 2005, Skadden provided a memorandum (the "Skadden Memo") to Mark Clayton, in-house counsel for Caesars, addressing, inter alia, the Change in Control provisions of the 1998 Plan. (Df. Ex. 2). The Skadden Memo stated that the Merger may take over 90 days to close, which makes determining the CCP impossible in a timely fashion. It proposed that Caesars could make an initial payment based on the 60-day period prior to the Change in Control date ...