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Litigation relating to Stock Awards

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   > > > Checklist: Contractual Precautions against Benefit Plan Litigation

2018.10.18  Eve of Vesting Termination - Equity Intervenes?  Following a stock purchase, an executive of the target company indicated his desire to leave when his employment agreement was scheduled to expire. The purchaser responded by terminating his employment one month beforehand, thereby preventing the executive from vesting in $425,000 of LTI benefits.  In Sellers v. Minerals Technologies, the 5th Circuit set forth two reasons for deciding in the CEO's favor. The first reflected a contract law analysis, namely: the employment agreement included a 30-day notice provision which, when applied to the executive's facts, delayed the effective date of his termination until after he had vested in the right to collect the LTI benefits. The second reason seems to reflect an equitable consideration. Here is the court's reasoning:

  • Under Texas jurisprudence, if one party prevents another from performing a condition precedent or renders its fulfillment impossible, then the condition may be considered fulfilled.7 Here, if Defendants effectively terminated Sellers’s employment in December 2014 (as opposed to in February 2015), as they suggest, then they unilaterally prevented fulfillment of the condition at issue and cannot rely on nonfulfillment to deny the LTI benefits otherwise contractually due to Sellers. 

Read literally, this seems to say that a service-based vesting schedule can be deemed satisfied when an employer frustrates vesting through a without cause termination. While that seems wrong on cold contract grounds, it seems to reflect the court's sense of equity and justice on the facts before it. Overall, employers should be extremely careful when pursuing, structuring, and implementing executive terminations at or near vesting events. Further case references appear below under "Eve of Vesting Terminations" but the list there is merely representative.  The 5th Circuit’s decision is not an aberration: equity does seem to tip the scales of justice in cases of this kind.


2018.10.04  From Law360: "Nikko Execs' $50M Suit Against CEO To Stay In US. -- A New York federal court on Thursday denied a bid by Nikko Asset Management Co. Ltd. to dismiss a suit alleging the company and its CEO defrauded senior executives and other employees out of $50 million by manipulating an employee stock-option plan, finding that the company has enough contact with the U.S. to warrant jurisdiction." 


2017.02.07  Stock Award Web Process Works: Non-compete Enforced.   As a general matter, employers “win” when they seek to enforce stock plan terms that have been fairly disclosed -- and accepted -- by award recipients.  ADP recently had such a victory.  In a case decided under New Jersey Law, the 3rd Circuit upheld the granting of a preliminary injunction against two former employees who had joined a competitor in violation of restrictive covenants set forth in their stock awards.  The former employees argued that ADP’s web-based system for issuing stock awards did not adequately alert them to the consequences of the stock awards they accepted. They lost because . . . continued at New Jersey Law.


2017.01.21  Equity Awards - ISO Tax Claims from Shortened Vesting Schedule . . . Employers often assume that they will avoid litigation when acting in what they believe will be the best interests of their employees. For instance, shortening a vesting schedule from 4 years to 6 months would seem favorable to stock option holders. Until they sue. That's what Uber faces from a complaint alleging that the shorter schedule deprived them of the tax benefits available for incentive stock options.

Deference to Committee Decisions

  • 2016.06.06  Spin-Merger Procedural Stumbles.  See "Merger-related Cashouts" below for a case involving $16 million of recovery by optionees due to flaws in the valuation and cash-out of their stock options.  
  • 2012.Jul.05  Executives Prevail in Stock Award Litigation due to Mis-step in Claims Procedures.  In disputes between employers and executives, the courts commonly enforce applicable contract or plan provisions according to their terms, but resolve ambiguities against the employers (as drafters of the documents).  The 8th Circuit's decision in Schaffart v. ONEOK provides a healthy reminder because the employer's decision -- by its authorized representative and fiduciary for its benefits committee -- "is not entitled to deference because the agreements and plans grant discretionary authority only to the ECC [Executive Compensation Committee], and the ECC neither decided appellee's claims nor delegated any authority." 

Employment Terminations on Eve of Vesting

  • CA Law: Schachter v Citigroup (Cal. App. 4th2009) – See this Paul Hastings Alert which includes the following sentence: “But in dicta, the court suggested an exception to its ruling: If an employee is terminated without cause, then the employee still may be entitled to a pro rata share of the compensation at issue.”
  • MA Supreme Court 2001: See Harrison v Netcentric (2001) re these points re employer’s alleged breach of covenant of fair dealing:
    o    “Fortune v. National Cash Register Co., 373 Mass. 96 , 104-105 (1977). The Fortune case and its progeny provide that an employer is accountable to a discharged employee for unpaid compensation if the employee is terminated in bad faith and the compensation is clearly connected to work already performed. See id. See also Cort v. Bristol-Myers Co., 385 Mass. 300 , 304 (1982); Gram v. Liberty Mut. Ins. Co., 384 Mass. 659 , 672 (1981) (Gram I); Sargent v. Tenaska, Inc., 108 F.3d 5, 8 (1st Cir. 1997).”
    o    “The defendants did not deprive the plaintiff of any income that he reasonably earned or to which he was entitled. His shares vested over time only if he continued to be employed; thus, the unvested shares are not earned compensation for past services, but compensation contingent on his continued employment. The plaintiff's argument to the contrary is belied by the terms of his stock agreement. Under the agreement, the plaintiff's shares were to vest each quarter that he remained a NetCentric employee until they had fully vested.”
    • “Because we conclude that the plaintiffs unvested shares do not represent compensation earned but not yet paid, we need not determine whether his termination occurred in bad faith.”
  • ​MA Superior Court 2003. See this article reporting on Cochran v Quest which indicates the Harrison decision (above) will not be blindly applied to unvested awards:
    • ​In light of the foregoing decisions, the Superior Court's 2001 decision in Aggarwal v. Nexabit Networks, Inc.14 comes as something of a surprise. In Aggarwal, the Superior Court held that Harrison does not preclude recovery for shares where "the employee has provided past services for virtually the entire scheduled period and is terminated right before the shares which he fairly earned and legitimately expected are due to vest."15 Therefore, although the court granted summary judgment for the employer with respect to the employee's claim for shares that were not scheduled to vest for more than one year after the employee's termination, it allowed the employee to maintain his claims for shares that were scheduled to vest two weeks after his termination, and for shares that were to vest under a "stock-for-patent" plan, where there was evidence that the employee had completed all work necessary to entitle him to the award of shares.16 Thus, although Harrison suggests that employees may not maintain claims for unvested stock options or shares, Aggarwal implies this rule will not be applied woodenly and may not preclude recovery where an employee is "on the brink" of being entitled to valuable compensation in the form of options or stock when terminated.17

ERISA Claims re Stock Awards

  • 2016.06.05.24  When is a Stock Award Plan Subject to ERISA?  The 9th Circuit addressed that question, and summarized applicable law from other federal circuits, in the course of concluding that ERISA does not cover the usual stock award plan. The court states in Rich v. Shrader (rehearing denied 2016.06.30):
    • While what qualifies under § 1002(2)(A) appears to be a matter of first impression in this circuit, we agree with our sister circuits that have determined that the paramount consideration is whether the primary purpose of the plan is to provide deferred compensation or other retirement benefits.
  • 2013.08.12.  Employee Stock Accumulation Plan Not Governed by ERISA.  Dubee v. Scammell, N.D.N.Y., No. 8:12-cv-01213-LEK-TWD, 8/12/13 (holding that a company's stock accumulation plan intended to provide highly compensated employees with equity compensation did not qualify as an ERISA-governed plan).
  • 2011.Feb.14  No Exhaustion of Remedies.  Claims by former employees under ERISA may proceed, without exhausting plan procedures that employer added after the litigation ensued -- see England v. Marriott Int'l (D.MD).
  • 2010.Aug.30  No ERISA Claims re Stock Option Misrepresentations.  The Second Circuit ruled that Pfizer's alleged misstatements about the expiration of an executive's stock options did not breach Pfizer's fiduciary duties under the Employee Retirement Income Security Act (aka ERISA) because the stock option plan was not subject to ERISA.  “In essence, Bell seeks to extend the ERISA fiduciary duty to unintentional misstatements regarding collateral, non-ERISA plan consequences of a retirement decision. The language of the statute weighs against such an extension.” (Bell v. Pfizer Inc., 2010 U.S. App. LEXIS 18111).

Forfeitures through Claims Releases

  • 2013.Aug.13  Option Claims Waived - Covered by Broad Terms of Separation Agreement.  The 6th Circuit's decision in Soddu v. Procter & Gamble dismissed a former employee's claims relating to his stock options because the "separation agreements' clear contractual language establishes that the agreements were intended to address every aspect of the employment relationship and broadly waive Soddu's rights against P&G."  Employers may want to take note of two contributing factors to the litigation.  
    • First, the claims release omitted any reference to the stock options (or any other benefits), and instead merely referred to waiver of "any right or claim resulting from, or for any reason connected with, the employment relationship." 
    • Second, after executing the separation agreements, the employer corresponded about the stock options in a manner that the employee considered to be an acknowledgement of their preservation.
  • 2012.Jan.12  Option Claims Survive - Not "Unambiguously" Released.  Executive's claims relating to his stock options avoided dismissal in Rawat v. Navistar (ND Ill), because "the Release does not unambiguously demonstrate Rawat's intent to release the claims alleged" with respect to his inability to exercise stock options due to a blackout period in effect after execution of the claims release.
  • 1998.08.31  Damages for Wrongful Termination include Lost Stock Options.  See Knox v Microsoft (Wash. Sup. Ct), holding that --​ The issue on appeal is whether the employee was entitled to seek money damages in his wrongful termination case for “lost” stock options, where the stock option agreements provided that if the employee was terminated, he would lose any unvested stock options and would be required to exercise any vested stock options within a certain time period. We conclude that the employee was entitled to pursue such damages. Accordingly, we reverse.

Merger-related Cashouts of Stock Options

​In business transactions, the parties generally address the target company's stock awards in a manner that honors the contractual rights of employees.  Costly lessons come, however, when deal terms run afoul of the change-in-control provisions within the target's stock award plan and/or award agreements.

  • 2016.06.22  Employees Win Spin/Merge Stock Option Litigation.  Delaware's Supreme Court awarded over $16 million to a private company's optionees in Fox v. CDX Holdings. The court upheld trial court findings that Plan terms (and the associated contractual rights of optionees) were violated both because (1) management, rather than the Board as plan administrator, determined "fair market value" in the step one spin-off, and (2) option proceeds were improperly held-back as part of the post-closing escrow arrangement that was built into the second-step merger agreement.
  • 2007  Out-of-the-Money Stock Options Improperly Cashed-out.  In Lillis v. AT&T (Del.Ch. 2007), optionees recovered $21M because they had not consented to the unilateral cash-outs of their underwater stock options in merger transaction.

Options: Post-employment Exercise

  • 2012.Jan.12  Meaning of "may" exercise for 90 days.  The 4th Circuit has upheld dismissal of a former executive's claim contesting expiration of his stock options three months after his employment terminated. The court held in Porkert v. Chevron as follows, at page 14 of the PDF:
    • We find no merit in Porkert’s contention that the parties did not reach a “meeting of the minds” regarding the particular LTIP term that his vested stock options had to be exercised within three months of his retirement. Porkert unequivocally accepted each stock option grant on an annual basis from 1999 until 2004, and did so knowing that each grant was expressly governed by the LTIP terms and rules.

Options expiring during Black-out Period

  • 2010.Apr.7   Rawat v. Navistar (ND IL, 212 U.S. Dist.LEXIS 1566), allowing executive claims to proceed, seemingly based on damage issues arising from employer's rejection of exercise efforts during black-out period associated with restating financials.​

Valuation of Employer Stock 

  • 2012.Jul.03  Private Company's Sale and Stock Value at Issue in Stock Award Litigation. When private employers sponsor stock award plans, valuation becomes a common source both for tax issues and for disputes with award recipients. In Fried v. Stiefel Labs, a S.D. Florida court denied the employer's motion to dismiss securities fraud and fiduciary breach claims against controlling shareholders. Those claims traced to valuation issues in the context of both a private equity investment and a later corporate sale.  
  • 2011.Nov  RSU Valuation and Code 409A: Because employer allegedly overpaid executive and sought to recover on the premise of a mistaken payment arising from a § 409A six-month holding period, Delaware law relating to deference to the Comp. Committee's decision was inapplicable, with employer losing because "Graphic Packaging must produce evidence showing why one valuation date is correct and the other date is incorrect" - and that showing was not made ("there is no historical practice that speaks directly to the proper valuation date for RSUs" under this circumstance).  Graphic Packaging v. Humphrey, 2010 U.S. App. LEXIS 23718 (11th Cir. 11/2010).
    • Note that this decision includes a solid discussion of the Delaware case law relating to broad deference to stock plan committees when they are making initial determinations.