In another case dealing with expired stock options, the U.S. Court of Appeals for the Fourth Circuit upheld a lower court’s dismissal of a former executive’s stock-option claim, ruling that his options properly expired under the terms of the company’s long-term incentive plan (LTIP) three months after his retirement. From 1999 through 2004, the executive received annual stock option grants under the LTIP. All were explicitly subject to the rules of the LTIP, which stated that vested options “may be exercised within three months from the date of termination (but in no case later than ten years from the date of grant).” At the time of his retirement in February 2005, the executive was vested in 72,000 of his 110,000 options. However, he did not attempt to exercise any of his options until May 2007. At that time, he was informed that all of his 110,000 stock options were cancelled by the company three months after his retirement.
In his appeal of the district court’s dismissal of his claim against the company, the executive argued that a final 1999 version of his employment agreement permitted him to exercise stock options for up to ten years from the date he received them, regardless of his retirement date. The executive contested the district court finding that the individual annual stock grants effectively modified this final employment agreement. Although the executive could not produce a copy of the written agreement, the Fourth Circuit followed the district court in assuming “the veracity and accuracy” of his alleged final employment agreement in reaching a decision.
The Fourth Circuit held that, under California law, an offer of stock options to an employee constitutes an offer for a unilateral contract, which is accepted if the employee continues his or her employment after the offer. According to the Fourth Circuit, the executive unequivocally accepted each stock option grant from 1999 to 2004, knowing that each grant was expressly governed by the LTIP terms and rules and that the LTIP terms explicitly required him to exercise his options within the lesser of three months from the date of his termination or ten years from the date of grant. The executive’s continued employment following the grants therefore constituted acceptance of the terms. Moreover, because the rule in California is that consideration is inherent when stock options are granted to an employee who continues in that employment with knowledge of the grant, the executive may not argue that the option grants lacked the consideration necessary to modify his prior employment agreement. The Fourth Circuit concluded that the stock-option grants modified any prior agreement to the contrary, and that the executive was only permitted to exercise his stock options within three months of his retirement date. Finally, the Fourth Circuit rejected the executive’s argument that the LTIP term “may be exercised” should be interpreted to mean that he may, but was not required to exercise his options within three months from the date of his retirement. (Porkert v. Chevoron Corp., 4th Cir. 2012)