LIT - Stock Award Risk Assessment Checklist

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Risk Assessment Checklist for Stock Plans and Awards

Organized topically below are recent cases involving stock plans and awards. Also presented are the implications of each case for employers and stock plan administrators. For case discussions, see Stock Award Litigation.

Topic	Risk Consideration	Reason for Concern
Timing of Grant – Backdating - Springloading	__ Be sure to fully document award grant dates, and to be sure the exercise price for stock options is not below-FMV on the date on which all approvals are received for the award. __ Be wary of accelerating the grant date for stock options in anticipation of an expected increase in stock value.	Ryan v. Gifford, 918 A.2d 341 (De. Ch. 2007). In re Tyson Foods, 919 A.2d 563 (Del. Ch. 2007)
Grant of Award - Individual Limits	__ Be careful to make awards which honor any applicable limits on individual (or aggregate) awards, with special attention to how performance-based limits for 162(m) purposes affect award practices generally.	Halpert v Zhang, D. DE, 8/8/2013.
Grant of Award – Mistake	__ When employees terminate employment or otherwise face expiration of their stock options, consider sending them a plan prospectus or other notice in order to avoid nuisance claims such as the one dismissed here	Porkert v. Chevron, 2012 WL 90142 (4th Cir. January 12, 2012)
Grant of Award – Valuation	__ Be sure that the fair market value of stock awards - at the time of grant or settlement - reflects a good faith (well documented) determination, and does not involve any misinformation about events such as pending merger or other material financial events.	Fried v. Stieffel Labs, 2012 WL 4364300 (S.D.Fla. 2012)
Grant of Award – Code 162(m) Exemption	__ Although there is no fiduciary duty to structure awards in a manner that qualifies for a Code 162(m) exemption, the compensation committees of public companies should endeavor to do so when feasible. See 162(m) Litigation.	Freedman v. Adams, C.A. No. 4199-VCN, 2012 WL 1099961 (Del. Ch. March 30, 2012)
Amending Award – 409A	__ Because ambiguities in award agreements, and amendments, are construed against the drafter, employers should assure that 409A amendments are precise (here, the cash-out of RSUs was uncertain under 409A's six-month delay rule). __ Also: be sure that there is adequate consideration, under applicable state law, for any amendment or cancellation of outstanding awards.	Graphic Packaging v. Humphrey, No. 10-12015, 2010 WL 4608775 (11th Cir. November 11, 2010)
Award_Termination – Merger	__ Watch for underwater stock options in a merger context, because an affirmative authorization to cancel them is needed in the underlying plan or award agreement. It is a best practice for plans to expressly address this.	Lillis v. AT&T Corp., 970 A.2d 166 (Del. 2009)
Award Expiration – Blackout	__ Be wary of stock options that expire during a black-out period. It is a best practice for plans to expressly address this in order to avoid angering employees and former employees who lose value due to a black-out period that interferes with their final time to exercise a stock option.	Rawat v. Navistar, No. 08-CV-04305, 2011 WL 3876957 (N.D. Ill. January 4, 2012); see also Bank of America v. Emert (SD NY 2010).
Plan Terms – Director Comp.	__ Consider receiving shareholder approval for director compensation (either all of just stock awards) in order to secure judicial review under the business judgement rule if shareholders bring actions alleging a fiduciary breach. See Director Compensation Litigation.	Seinfeld v. Slager, C.A. No. 6462-VCG, 2012 WL 2501105 (Del. Ch. June 29, 2012)
Plan Terms – Defined Terms	__ Never be afraid to lengthen a plan to define terms and to address potential issues, because any litigation involving ambiguities is likely to be resolved against the employer.	AIG v. Guterman (2d Cir. 9/19/2012) (claim for severance dismissed due to specific plan provision re good reason).
Plan Terms - Code §162(m)	__ Be sure that neither a stock plan nor the proxy statement proposal describing it creates any unintended implication that awards must be structured to qualify for a Code §162(m) exemption. Rather, be explicit in stating that such an exemption is an alternative but is not required.	Seinfeld v. O’Connor, 774 F. Supp. 2d 660 (D. Del. 2011) (no ambiguity; claim dismissed); Hoch v. Alexander, C.A. No. 11-217, 2011 WL 2633722 (D. Del. July 1, 2011) (uncertain; not dismissed).
Plan Terms – Stock Splits	__ Confirm that the plan has a provision adjusting its share reserve, as well as the terms of outstanding awards, in the event of stock splits and similar transactions. ALSO: avoid accounting issues that would arise from a deemed modification of awards by making adjustments mandatory, not permissive.	Sanders v. Wang, 1999 WL 1044880 (Del.Ch. 1999)
Dispute Resolution – Deference	__ The courts will generally honor arbitrary and capricious standards for judicial review, subject to applicable state law.	See Comrie v. Ipsco (7th Cir. 2011) (focuses on non-qualified plans but logic applies to stock plans).
Dispute Resolution – Plan Interpretation	__ Unless specified otherwise, plan terms have their ordinary meaning and the employer's failure to do so may violate contract law covenants requiring good faith and fair dealing.	Scribner v. Worldcom, 9th Cir (5/8/2000).
Dispute Resolution – Limitations Period	__ For compensation-related claims, a company's incorporation in Delaware supports enforcement of its choice of law provision, resulting in a one-year limitations period rather than six years under NY law. __ Plans should designate well-considered choice of law.	Barton v. Martha Stewart Living (SD NY 9/17/2012) (severance plan action but hinges on NY vs DE law).
Dispute Resolution – Process	__ Be sure to follow the claims procedures set forth in a plan in order to avoid judicial reversals for imperfect processes. __ Consider including plan and award provisions that specify a choice of law and forum designation that are desirable for the employer.	Schaffart v. ONEOK, 686 F.3d 461 (8th Cir. 2012).
Dispute Resolution - Waiver of Claims	__ In separation agreements, employers should include a non-exclusive reference by way of example to the types of claims being released - with stock awards being listed to the extent intended. __ After executing separation agreements, employers should be careful to assure that future correspondence unambiguously reiterates the employers position about how stock awards are being handled.	Soddu v. Procter & Gamble (6th Cir., 8/13/13) - dismissed claims relating to stock options based on broad references to the waiver of employment-related claims.