Discharged Executives Options Can Be Valued at Time of Discharge

In Scully v. US WATS Inc. (3rd. Cir., No. 99-1590, 2/1/01), an executive, Mark Scully, argued that the options he was given at the time he was fired should have been valued effective as of the date the options were to expire, not when he was terminated. The Third Circuit Court of Appeals upheld a lower courts ruling that the companys decision to value them at the earlier date was legitimate, but that the companys contention that it should also be able to take a 30% discount for the lack of marketability of the shares at the time of termination was not sustainable.

Scully was hired by US WATS as its president and given options that vested over two years. He was fired after 18 months. US WATS told him his options now expired because he was fired. Scully contended that he was improperly terminated and successfully sued to have his options restored. At the time he was fired, his options were valued at $531,000. Six months later, when the options would have vested had he not been fired, they would have been worth $1,078,000. A Pennsylvania district court agreed on the unlawful termination, but disagreed that the value of the options could be put forward to the time he normally have vested. The company then contended that it should be able to value the shares at a 30% discount because, at the time, the shares could not be exercised. The court rejected this argument, saying that the restriction period on the shares should not have been a factor in pricing them, a finding that seems at odds with the holding that the restriction period did matter in terms of the ultimate price. The appeals court approved the lower courts findings, however.