Complex business transactions often require multiple agreements to address different parts of the transaction. As an example, the package of documents for the sale of a small business could include a contract of sale; agreements containing confidentiality provisions and restrictive covenants; an agreement for post-closing transition services to be provided by the seller; and/or an agreement to purchase the real property where the business operates. When dealing with so many moving parts, one risk that results is the possibility that two agreements deal with some overlapping subject matter and there are inconsistencies between them.

A recent decision of the New York Appellate Division First Department highlights the trouble that can result from this situation. In O’Connor v. Society Pass Inc., the plaintiff accepted employment with a start-up company as its chief marketing officer. Compensation was to include an equity grant of 10 percent of the company’s common shares. However, the company’s Employment Agreement put conditions on the receipt of the equity – the plaintiff was required to satisfy a group of Key Performance Indicators to be agreed upon by the parties and had to remain an employee of the company as the shares vested. The agreement also provided for the shares to vest over four years on a quarterly basis.

Two months later, at the time the equity was to be issued, the company presented the plaintiff with a Stock Warrant (i.e., an agreement confirming the employee’s right to purchase the shares at the price of a fraction of a cent per share). The Stock Warrant did not reference the conditions in the Employment Agreement. There was no mention of the key performance indicators, vesting over four years or the requirement that the plaintiff remain employed through the vesting period. Instead, the Stock Warrant provided for 50 percent of the shares to vest immediately, with the balance to vest over one year. Further, the only way the shares under the Stock Warrant would be forfeited was if the plaintiff voluntarily resigned.

The relationship between the parties soured, and the company refused to issue the shares to the plaintiff, referencing the conditions in the Employment Agreement. The plaintiff then sued for breach of the Stock Warrant.

The lower court held that the later-in-time Stock Warrant superseded the Employment Agreement and controlled the employee’s right to the shares. The Appellate Division affirmed.

The appellate court found that there was insufficient evidence of the parties’ intent to treat the two documents as “a single integrated agreement,” even though a copy of the executed Employment Agreement was physically attached to the Stock Warrant. In addition, the Court relied on a provision in the Employment Agreement that stated the Employment Agreement could be amended in a writing signed by both parties. As both the company and the employee signed the Stock Warrant, the Court deemed it to be an amendment of the equity provisions of the Employment Agreement.

The decision is a disastrous result for the company, which would potentially be required to grant equity to an ex-employee who it maintained was actively working against the company’s best interests (or, more likely, to buy out that equity).

The case illustrates the importance of having experienced transactional counsel who will not lose the forest for the trees and will ensure that all agreements are aligned.

If you are entering into a business transaction, contact one of our attorneys for a consultation.