In overturning the lower court’s opinion, the Court ruled 5 to 3 that the plaintiff was entitled to the value of the stock option at the time the agreement was breached and not at the time of the subsequent trial.
“We conclude that the proper measure of damages was the value of the stock on the date the stock option agreement was breached, minus the exercise price,” ruled Justice Craig Enoch in the majority opinion of Miga v Jensen.
Dennis Miga was hired in 1990 to run a long distance company newly formed by Ronald Jensen. As part of the compensation package, Miga was entitled to a 6% ownership in the company. Miga’s ownership interest was reduced to 4.8% after the merger of the newly formed company and one of Jensen’s other holdings.
In 1992, Jensen invested in Gateway Pacific Exchange and Miga was given an verbal contract to purchase Gateway Pacific stock. Miga resigned in 1994, and under the separation agreement, Miga was assured verbally that his option to buy Gateway Pacific stock would not be affected. Jensen later refused the option exercise and Miga sued for a breach of contract.
Miga contends he should have been allowed to purchase 4.8% of Gateway Pacific stock at original cost. Jensen claimed that upon termination, Miga’s option expired.
In 1995 Gateway Pacific’s stock split 940 to 1 and later went public. Subsequently, the stock appreciated from $12 to $35.75 per share by the time of the 1997 trial.
At the initial trial, the jury awarded Miga$1,034,400 for the breach of contract and $17,775,686 for “lost profits,” calculated at the stock’s price at the time of trial. Jensen claimed that the award should have been based on the value of the option at the time of the alleged breach, not at the time of the trial.
The Texas Supreme Court in reversing the lower court’s ruling, stated, “calculating the value of an unexercised option can be a complicated enterprise, requiring the application of finance models to determine the present value of the right to purchase stock at a fixed price at some future time. But when, as here, breach occurs when the option holder seeks to exercise the option, the option becomes a straightforward contract to sell a certain amount of stocks at a certain price at the time chosen by the holder”.
A dissenting opinion filed by Justice Michael Schneider contends that such a ruling encourages “promisors to breach stock-option agreements in a rising market, allowing them to cap their liability while reaping the profit that was promised in exchange for the promisee’s performance”.
Schneider said the Miga’s award should have been based on a calculation at the “stock’s highest intermediate value between the date of breach and a reasonable period in which the injured party could have entered the market and replaced the stock”.