The article discussed the federal trial court decision in First
Marblehead Corp. v. House. The court held that “…. the terms of the
instrument approved by the company’s board of directors granting the
option must control, despite any conflicting terms in the memorandum or
worksheet provided to the executive.” By way of background from the Utz
article:
… the executive had previously received a two-page memorandum
setting forth the principal terms of the grant, which had indicated
only that the options “must be exercised within 10 years of the date of
grant.” There had been no mention in the memorandum of any three-month
deadline for exercise following termination of employment.
…
the executive never saw the specific grant of incentive stock options
nor the complete plan document prior to his leaving the company. The
executive contended that he believed he could exercise his stock
options at any time within the 10-year period. He indicated that no one
at the company ever told him anything about time limits for exercise
upon termination of employment (and the employee did not inquire about
any such limits).
The court rejected the executive’s breach of
contract argument that the written terms of the grant, and in
particular the three-month deadline for exercise following termination,
did not apply because the memorandum the executive received stated that
the options had a 10-year duration.
Utz states that the lessons are: “… recipients of stock option
grants should … carefully read the terms of their grants and the terms
of the underlying stock option plan document … [for employers] stock
option plan documents and grants should be written carefully and
precisely ...”
From our perspective at Two Step, this case reiterates the important
lesson that has been most recently illustrated in the stock option
backdating scandals which is that stock option documentation must be
carefully managed and retained. It will be required in any dispute
like the First Marblehead case, in any investigation like the recent
backdating scandals, or by auditors during their annual audit of
compensation expense.
At least in this case, there was no dispute over the facts or the
existence of each document. In most cases, there is a tangled web of
documents that relate to the board grants, the plan documents, the
employee’s agreements, and the exercise documents. Sometimes there are
inconsistencies that make it even more challenging. And even if not,
think about the time spent trying to find all the documents related to
a particular stock option. How many Board minutes would have to be
searched?
All documents need to be easily accessible and stored in a manner
that connects all the pieces. It’s worth the time and effort to upload
all the documents into a consolidated online system that can be
searched and can connect each person’s name to all the related
documents. The archaic methods of using three ring binders and file
folders has not proven for most companies to be a solid plan that will
prepare a company for future unforeseen events.