Falkowski v. Imation Corp., 132 Cal. App. 4th 499 (2005)

Plaintiffs in this class action were employees of Cemax- Icon, Inc., a closely held company in the medical information management business. This litigation arose after Imation Corporation, a publicly traded company, acquired Cemax, which became a subsidiary of Imation. At the time of the merger, Imation replaced the employees’ Cemax employee stock options with options to purchase Imation stock, but a year later, Imation sold Cemax to Eastman Kodak and cancelled all of the employees’ unexercised Imation stock option rights. The employees alleged that because at all times they remained employees of Cemax, which continued in operation as a corporate entity after the merger, the cancellation of their option rights constituted a breach of contract. The Court of Appeal affirmed summary judgment in favor of Imation on the ground that it would not have served Imation’s business purposes to allow the employees of one of its former subsidiaries to exercise stock options after the sale of the subsidiary to another company. Cf. Daly v. Yessne, 131 Cal. App. 4th 52 (2005) (board of directors permitted to establish fair market value for repurchase of former employee’s stock).