New Developments: Supreme Court of Missouri on cancelled shares

The Supreme Court of Missouri has erroneously held that put options may be exercised even after the underlying shares have been cancelled. In Weinstein v. KLT Telecom, Inc., Weinstein obtained an option in December 2000 to put shares of DTI Holdings, Inc. to KLT Telecom, Inc. at $15 million. The option was exercisable beginning September 1, 2003. Weinstein gave the share certificates to an escrow agent to hold. DTI entered bankruptcy in 2001 and in June 2003 the bankruptcy court cancelled all DTI equity securities. On September 2, 2003 (September 1 was Labor Day), Weinstein sought to exercise the option. KLT refused and Weinstein filed suit. KLT’s primary defense was failure of consideration because the shares had ceased to exist at the time of exercise.

Judge Limbaugh held that the consideration should be measured when the option contract was entered into and thus the option was supported by consideration, even though the shares later became worthless. To the extent KLT was arguing failure of performance by Weinstein, Judge Limbaugh held that

The shares, though worthless, do in fact exist, and they were tendered to [KLT] through the escrow agent.

Judge White, in dissent, pointed out the distinction between worthless shares and nonexistent shares. If the value of the DTI shares had simply been zero, the option could be exercised. However, the shares were cancelled; they ceased to exist. Thus there was a failure of consideration.

Judge White must be correct in this interpretation. Missouri’s corporations statute does not contain a cognate to MBCA § 6.03(a): “Shares that are issued are outstanding shares until they are reacquired, redeemed, converted, or cancelled.” Nonetheless, the common law concept of cancelling shares is that the shares cease to exist. Obviously the certificates for cancelled shares simply represent nothing. This case could be taught in Chapter 6 at page 197 in connection with the concept of “outstanding”.