In Haslund v. Simon Property Group, an Illinois Appellate Court held an employment agreement that provided for an employee to receive one percent equity interest in a new company was not too indefinite to be enforced. The court made such ruling notwithstanding the fact that there were missing terms in the agreement, such as when the shares would vest, whether the shares would be voting or non-voting, and whether there would be any restrictions on the shares.
Plaintiff Sharon Haslund ("Haslund") accepted a position as vice president of operations with clixnmortar.com (the "Company"), a subsidiary of Defendant Simon Property Group ("SPG"), a real estate company that operates shopping malls. Haslund received a letter from SPG's director of human resources that confirmed that, in addition to her salary in the amount of $175,000, Haslund would receive a one percent equity interest in the Company with the Astructure to be determined.
After she began her employment with the Company, Haslund requested the shares from SPG, but never received the same. Ten months after she started at the Company SPG terminated Haslund’s employment. Haslund subsequently filed suit in order to obtain her shares. SPG argued that the contract was too indefinite to be enforceable under Illinois law.
After a trial, the court awarded Haslund damages in the amount of $537,634. On appeal, SPG argued that the contract was too indefinite to be enforceable. The Appellate Court noted that while an incomplete contract poses interpretative questions, such a contract may nevertheless be enforceable; otherwise, there would be very few enforceable contracts if the omission of certain terms would render a contract unenforceable. A contract, however, is too indefinite to be enforceable when it omits a crucial term that a court cannot reasonably be asked to supply for the purpose of interpreting a contract.
For example, the Appellate Court noted that the absence of a contract price would likely render a contract unenforceable. "Not only is price so central, so that if the choice of price could be delegated to a court it would be the court and not the parties that was the contract maker, but there is no interpretive path that leads from the terms the parties agreed on to the price they would have agreed on." Further, the Appellate Court noted that the omission of such a central term as the contract price would be evidence a contract was not intended by the parties.
Thus, the Appellate Court reasoned that if the employment agreement stated Haslund would receive equity but had not specified the amount, a court could not supply the missing percentage. There would be no interpretative technique a court could use to enable it to determine what the parties had agreed and the percentage of equity Haslund would receive. In this case, however, the percentage was specified, but the agreement omitted various other details, such as the form of the equity, or whether there would be restrictions on vesting. While the Appellate Court found such details were important, their absence did not render the agreement unenforceable. Evidence of custom in the industry, the court noted, could be used to supply the missing terms. The Appellate Court noted there might be a custom in the industry as to whether shares in a startup company issued to a new employee would provide voting rights; whether the stock would vest immediately or only after the employee has been employed with the company for a certain period of time; whether the right to such shares would be forfeited if the employee was terminated for cause; and whether and to whom such an employee could sell the shares of the company once issued to the employee.
The Appellate Court in this case held the evidence presented by Haslund was sufficient to establish the contract was enforceable and that it was breached by SPG. The former president of the Company testified that there were no restrictions on the equity interest that Haslund was to receive and that the phrase "structure to be determined" meant that SPG had not yet determined what form the equity would take, such as the number of shares that would be issued and whether there would be classes of stock.
While the Appellate Court ultimately found the contract was sufficiently definite to be enforced, the Appellate Court reversed the trial court judgment because Haslund failed to prove the amount of her damages. The Appellate Court found that the trial court had erred in awarding Haslund over $500,000 in damages when, at the time Haslund was fired, the Company had not shown a profit or a basis upon which its capital value could be determined; the Company had no assets whose value could be appraised; and the financial transaction upon which the trial court based its estimate was a poor indication of the Company's value.
The Haslund case demonstrates that a contract may still be enforced even if there are missing terms, as long as the plaintiff presents sufficient evidence, such as custom in the industry, to supply the missing terms. If you are about to enter into employment with a start-up firm and have questions about promised equity, please contact a member of the firm.