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Barr v. Harrah's Entertainment

May 29, 2008


The opinion of the court was delivered by: Irenas, Senior District Judge


Plaintiff commenced this class action against Defendant on October 21, 2005, alleging breach of contract and seeking specific performance.*fn1 Before the Court are Defendant's motion for summary judgment and Plaintiff's cross-motion for summary judgment. (Docket Nos. 62 & 67). The greater than $20 million question presented by the parties is, fundamentally, what was the "highest price per share of Common Stock paid [in a merger]"? Such a seemingly simple question is complicated by the intricacies of three stock-based incentive plans established primarily for highly compensated employees, a cash-out provision within the earliest of those plans, and a 2004 merger agreement. Despite the relative complexity of the question, the Court finds the plans and agreement unambiguous, and for the reasons set forth below, Defendant's motion will be granted and Plaintiff's cross-motion will be denied.


This case involves a July 14, 2004 merger agreement (the "Merger Agreement") between Defendant Harrah's Entertainment, Inc. ("HET"), Harrah's Operating Company, Inc.,*fn2 and Caesars Entertainment, Inc. ("Caesars").*fn3 Pursuant to the Merger Agreement, HET acquired Caesars on June 13, 2005. Plaintiff Wallace Barr was the CEO of Caesars when the merger closed. Since the dispute between the parties centers around the interpretation of the PPE/Caesars 1998 Stock Incentive Plan (the "1998 Plan"), the Court will begin its discussion of the facts there.

The 1998 Plan

The 1998 Plan was adopted at the same time PPE was created. It was based upon, and virtually identical to, a 1996 Hilton Stock Incentive Plan. (Compare Orlofsky Cert., Ex. 4, with Orlofsky Cert., Ex. 6.) Both plans authorized stock option awards, which were intended to compensate officers and employees who contributed to the management, growth, and profitability of the companies. (Id., §§ 1, 4.) At the time the plans were adopted, neither Hilton nor PPE offered any other type of equity awards.*fn4 (Kraus Cert, Ex. 7, 21:23-22:7; Ex. 8, 27:24-28:19.)

The 1998 Plan provided for accelerated vesting of stock options in the event of a "Change in Control," which was defined to include "[t]he approval by the stockholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ('Corporate Transaction')."*fn5 (Orlofsky Cert., Ex. 4, § 7(a), (b)(iii).) Upon a Change in Control, all outstanding stock options became "fully exercisable and vested to the full extent of the original grant." (Id., § 7(a).)

In addition, pursuant to section 5(j) of the 1998 Plan, "during the 60-day period from and after a Change in Control (the 'Exercise Period') . . . an optionee [had] the right . . . to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Corporation and to receive cash, within 30 days of such notice." (Id., § 5(j).) Thus, any option holder who elected to receive cash was to be paid, at most, within 90 days after shareholder approval of a merger. The amount of cash an option holder received would be determined by multiplying the total number of shares granted under the stock option by the difference between the "Change in Control Price" and the option grant's exercise price per share. (Id.)

(Orlofsky Cert., Ex. 4, § 3.)

The Change in Control Price, the determination of which is critical to the resolution of this case, was defined as the higher of (i) the highest reported sales price, regular way, of a share of 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 or Corporate Transaction. (Id., § 7(c) (emphasis added).)*fn6 The 1998 Plan defined "Common Stock" as "common stock, par value $.01 per share, of the Corporation." (Id., § 1(k).)

The PPE Supplemental Retention Plan (the "2001 SRU Plan") PPE adopted the 2001 SRU Plan effective November 1, 2001. (Orlofsky Cert., Ex. 18, Art. 1.) Its primary purpose was to provide "deferred compensation for a select group of management or highly compensated employees." (Id. (internal quotation marks omitted).) The 2001 SRU Plan was "intended to be a non-qualified retirement plan which [was] unfunded." (Id.; see also Arts. 7.1, 9.8.)

Pursuant to the 2001 SRU Plan, eligible employees would receive a certain number of "Rights" each year, as determined by PPE's CEO. (Id., Art. 4.2.) A "Right," which the parties also refer to as an "SRU," was defined as "a right equivalent to one share of Company Stock," which was in turn defined as "shares of common stock of the Company that may be issued or transferred under the Plan." (Id., Art. 2.) The 2001 SRU Plan required PPE to "create and maintain an unfunded Account on its books to reflect the number of Rights credited to each Participant . . . in any Plan Year." (Id., Art. 4.2.) The value of an employee's account at a particular time was "determined as if those Rights were shares of Company Stock." (Id., Art. 4.4.)

A participating employee's entitlement to the SRUs credited to his account would vest incrementally over a four-year period. (Id., Art. 5.1.) If an employee ceased employment with PPE, any SRUs that had not fully vested after four years would terminate. (Id., Art. 5.2.) The 2001 SRU Plan made exceptions to the termination of SRUs if a participating employee died or became disabled or if there was a "Change of Control,"*fn7 as long as such an event occurred while the individual was still employed by PPE.

(Id., Arts. 5.3, 5.4.) In such instances, not only would the credited SRUs remain in effect, but they would also fully vest as of the date of the employee's death or disability or the Change of Control, regardless of the four-year vesting period. (Id.) However, even when an employee's SRUs became fully vested, whether after four years or upon a Change of Control,*fn8 they were not distributed as shares of company stock until "the first day of the thirteenth month following the Participant's Retirement."*fn9

(Id., Art. 6.2.)

The 2001 SRU Plan provided that the aggregate number of shares of Company Stock that could be issued or transferred was 2,500,000 shares. (Id., Art. 7.2.) The shares that were available to be issued were "treasury shares that [had] been reacquired by the Company." (Id.) PPE's obligations under the 2001 SRU Plan could not be assigned or transferred "except to . . . any corporation or partnership into which [PPE] may be merged or consolidated." (Id., Art. 9.6.) If PPE's board of directors determined that such a Change of Control was imminent, it was required to "cause [PPE] to create and fund a grantor trust of [PPE] that shall serve as the vehicle for paying all benefits due under the Plan and the number of shares of Company Stock contributed by [PPE] shall be that number of shares the Board determines would then due [sic] if the Plan were to terminate and all benefits were then to be paid in a single distribution." (Id., Art. 9.8.) That same provision of the 2001 SRU Plan provided that "[n]otwithstanding any segregation of assets or transfer to a grantor trust . . . nothing contained herein shall give any . . . Participant any rights to assets that are greater than those of a general creditor of [PPE]." (Id.)

The Caesars 2004 Long Term Incentive Plan (the "2004 Plan")

In March of 2004, PPE, now operating as Caesars, adopted the 2004 Plan. It provided for the grant of various stock-based awards as an incentive to directors, officers, employees, and consultants of Caesars to continue with the company and to increase their efforts on behalf of the company. (Orlofsky Cert., Ex. 9, § 1.) The 2004 Plan was an unfunded plan and stated that an award grantee "shall have no rights as a stockholder with respect to any shares covered by the Award until the date of the issuance of a stock certificate to him for such shares." (Id., § 8(g), (h).) The parties focus their attention specifically on Restricted Stock Units ("RSUs") granted pursuant to the 2004 Plan.

RSUs were defined as "a right granted to a Grantee under Section 6(e) to receive Stock or cash at the end of a specified deferral period, which right may be conditioned on the satisfaction of specified performance or other criteria." (Id., § 2(x).) The 2004 Plan defined "Stock" as "shares of the common stock, par value $0.01 per share, of [Caesars]." (Id., § 2(aa).) It provided for the reservation of a maximum of 20 million shares of Stock for the grant of any awards. (Id., § 5.) Under the 2004 Plan, the shares available to be issued could be "authorized but unissued shares or shares that shall have been reacquired by [Caesars, i.e., treasury shares]." (Id.) Moreover, in the event that a merger affected the Stock such that there would be an adverse impact on any rights of Grantees, Caesars' Compensation Committee had the authority to "make such equitable changes or adjustments as it deem[ed] necessary or appropriate to . . . the number and kind of shares of Stock or other property (including cash) issued or issuable in respect of outstanding Awards." (Id. (emphasis added).)

RSUs were subject to vesting and forfeiture conditions. Often RSUs granted under a particular award would vest over a period of years.*fn10 (See Orlofsky Cert., Ex. 13.) However, in the event of a "Change in Control,"*fn11 any unvested RSUs became fully vested and any payment or forfeiture conditions lapsed. (Id., Ex. 9, § 7.) If a grantee's employment was terminated or if he failed to satisfy any conditions necessary to receive Stock or cash, all unvested RSUs were forfeited. (Id., § 6(e)(ii).) "Upon the vesting of the RSUs granted to the Grantee . . ., the Grantee [was] entitled to receive, as soon as practicable thereafter, a distribution of a number of shares of Stock that [was] equal in number to the aggregate number of vested RSUs then credited to the Grantee's account; provided, however, that [Caesars' Compensation Committee could] determine that all or any RSUs payable [could] be settled in cash." (Id., Ex. 13 ...

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