Case Study
 

Mark Gilchrest came to us with a problem. After 19 years as a senior executive at a sophisticated high-tech company providing IT support to government clients, he wanted to exercise his stock option award. But the company stock plan was complicated and the company president told Mark (not his real name) that he was not eligible to exercise his options, and that the strike price had been increased.

 

Mr. Liebeler analyzed the stock plan and it became clear that the company president was engaged in a concerted effort to withdraw and devalue previously promised stock options to high level executives. Mr. Liebeler advised Mark on the proper procedures required to exercise the stock options. After the executive properly exercised his options, the company then attempted to impose an onerous non-compete as a precondition to issuance of the executive’s shares.

 

Game On. We quickly filed suit on behalf of the executive in the Circuit Court for Fairfax County. On a motion for summary judgment briefed and argued by Mr. Liebeler, the Court ruled in favor of the executive and invalidated the non-compete.

 

At trial a month later, a jury returned a verdict in the executive’s favor requiring the company to issue all of the executive’s stock at the exercise price established in the stock option agreement. The company’s counterclaim for breach of fiduciary duty was dismissed.

 

Principles
 
  • Stock options are frequently an integral part of an executive’s compensation package. However, the complexity of many stock option plans may lead to confusion and disputes regarding vesting, strike price, exercise requirements, and repurchase obligations by the employer.

  • Decision by stock plan participants are further complicated by tax laws that may require stock option sale proceeds to be treated and taxed as ordinary wages.

  • Stock options issues frequently arise at the termination of an executive’s employment and both employer and executive are wise to retain legal counsel experienced in corporate law, tax law, employment law, and litigation.

  • Employers with stock plans should have legal counsel periodically review and update the plan as necessary to comply with changes in applicable law

Take calculated risks. That is quite different from being rash.

GEORGE S. PATTON

Stock Options