The United States Court of Appeals for the First Circuit recently upheld the terms of a Capital Accumulation Plan (“CAP”) providing that employees who voluntarily resigned their employment before their stock shares vested would forfeit their employee stock and monetary compensation diverted to purchase the stock. See Gilmore v. Citigroup, Inc. (In re: Citigroup, Inc. Capital Accumulation Plan Litigation), 535 F.3d 45 (1st Cir. 2008). Gilmore was a multidistrict class action commenced by former employees of Citigroup and its various subsidiaries. The court rejected the plaintiffs’ arguments that upon resignation they should not have to forfeit monetary compensation set aside to purchase restricted shares of Citigroup stock.
The CAP at issue was a voluntary plan in which a participating employee diverted a portion of his or her compensation to purchase restricted stock at a discounted rate. The stock was subject to a two or three year vesting period. If an employee voluntarily resigned before the shares vested, the employee forfeited the unvested restricted shares and, by extension, the equivalent amount of compensation diverted to purchase those shares.
Participating employees signed an election form for each accrual period in which the employee wished to participate, which specifically stated that the unvested shares and diverted funds would be forfeited in the event of a voluntary resignation. Eligible employees also received a CAP prospectus indicating that a participant who (i) voluntarily terminated his or her employment prior to the vesting of the shares would forfeit his or her restricted stock, and (ii) was involuntarily terminated without cause or retired would forfeit the restricted stock and receive a cash payment equal to the portion of his or her compensation that had been paid in the form of restricted stock. A participating employee also received a Restricted Stock Award Agreement (“RSAA”) containing forfeiture language similar to that in the prospectus.
The plaintiffs argued that the RSAA was the governing document for the CAP because it was the only document signed by both the employer and the participant. They further claimed that because the RSAA did not explicitly address the forfeiture of the compensation diverted to purchase the restricted shares, such compensation should not be forfeited. The court, however, rejected such arguments because the RSAA expressly referred to the other CAP documents and reflected an intent to incorporate the other CAP documents as supplements to the RSAA. The Court found that the various CAP documents read together constituted the relevant CAP contract.
Alternatively, the plaintiffs claimed that the various plan documents were ambiguous and should be construed in their favor because only the election form expressly stated that upon resignation participating employees would forfeit both the unvested stock shares and the money set aside to purchase those shares. The court found that the election form was unambiguous regarding the forfeitures facing a departing CAP participant and that the other documents implied such a term by differentiating between the treatment of a resignation and a termination without cause or retirement.
The court also rejected the plaintiffs’ allegation that their employment agreements, which were commission grids, were breached by their receipt of reduced compensation due to the forfeiture. The court held that the CAP modified and superseded the terms of the grid because by participating in the CAP, employees agreed not to receive their entire commission amounts in exchange for the opportunity to instead receive restricted stock. Consequently, the court held that the reduced amounts the plaintiffs received resulted not from a breach of contract, but rather from the employees’ own elections to participate in the CAP.
While the Gilmore decision is a significant victory for employers seeking to enforce the terms of their voluntary equity deferral plans, it also provides important guidance as to how employers can best ensure the enforceability of the forfeiture provisions in their equity plans. For instance, forfeiture provisions should be explicitly and consistently stated in all plan documents. If the equity plan consists of multiple documents, each document should specifically indicate that it incorporates the other plan documents. Additionally, if a compensation arrangement may be superseded or modified by or subject to an equity plan, employers should consider expressly referencing such plans in the compensation agreement.