Compliance January 4, 2005

Appeals Court Reverses Employee Stock Option Vesting Ruling

January 4, 2005 (PLANSPONSOR.com) - A federal appeals court has overturned a lower court's ruling that allowed an employee who left a company four months before it merged with another firm to be entitled to accelerated vesting in her stock options.

Reported by

Kip McDaniel

>The US 5th Circuit Court of Appeals ruled that Rhonda Sanchez, awarded nearly $2 million in a jury trial, was not entitled to accelerated vesting, asserting instead that the stock option agreement required a “double-trigger”, not the “single-trigger” that the jury has based its decision on. Sanchez had asserted that the agreement was ambiguous and should have been interpreted as allowing her to vest in her options at an accelerated rate even though she left before a merger.

>Sanchez worked for Verio Inc. from February 1998 until her discharge in April 2000 and during her employment received grants of options to purchase over 40,000 shares of the company’s common stock. When she was terminated, she was vested in over 11,000 options and unvested in nearly 30,000.

>The stock option agreement allowed for accelerated vesting if employment ended “without cause or voluntarily with good reason within 12 months of a change of control,” according to the ruling, written by Circuit Judge Jerry Smith and supported by Judges Edith Jones and Carl Stewart.

>Four months after her employment ended, Verio merged with NTT Communications Inc. Sanchez then asked for accelerated vesting in her options, and when her request was denied, she filed suit, alleging a breach of the option agreement. In a jury trial, Sanchez asserted that the contract required a “single-trigger” – that her vesting accelerate upon her termination without cause regardless of any corporate event. Based on this argument, the jury awarded her nearly $2 million.

>Smith rejected this argument, however, stating that there was a “double-trigger” in the agreement – that the termination occur within twelve months of a change in control, as well as the previously stated trigger. He ruled that the contract was unambiguous in that the termination must occur after the change in control, not before. Thus, Sanchez could not have accelerated vesting, since she left the company before the merger with NTT.

>The ruling in Sanchez v. Verio Inc. is here .