Court Finds no Ambiguity in Accelerated Vesting Provision of Severance Plan

May 12, 2006 ( - The 6th US Circuit Court of Appeals has affirmed a lower court's decision that an employer did not act arbitrarily when it denied a former employee's request to exercise stock options under an accelerated vesting provision of a severance plan.

In its opinion, the appellate court said that HRB Management Inc., a subsidiary of H & R Block, interpreted the severance plan according to its plain meaning, and that the only way to interpret the accelerated vesting provision is the way HRB interpreted it.

Philip Ziegler had received a stock option allowing him to purchase 500 shares of H & R Block stock at a certain price.   According to the court document, the option vested in thirds either at an anniversary of the stock’s grant date or at a certain price that is maintained by the market for 30 consecutive trading days. HRB told the court that Ziegler was allowed to exercise the second third of his option only by a clerical error, but it did not seek reimbursement from him.

Ziegler was terminated due to a reduction in force and became eligible for benefits under H & R Block’s severance plan.   The severance plan had a provision stating that, “[A]ll outstanding incentive stock options … that would have vested during the 18-month period following such Termination Date had the Participant remained an employee with the Participating Employer during that period will immediately vest as of the later of the Termination Date or Release Date.”

After his termination, when the stock price maintained the level required to vest the final third of the option, Ziegler requested to exercise his options.   HRB denied his request saying the final third was not vested.   Ziegler filed a lawsuit claiming that the options vested under the provision of the severance plan, and that the provision required HRB to “wait-and-see” if the options vested in the 18-month period, then retroactively vest the options.

A lower court granted summary judgment in favor of HRB. The appellate court affirmed its decision, saying the phrase “would have vested” was not the same as “could have vested.”   According to the court, the requirement that the options immediately vest supported the interpretation that HRB only vest the options it knows will vest in the 18-month period and not “wait-and-see” if the options do vest under the pricing condition.

The opinion in Ziegler v. HRB Management Inc. is here .