A recent decision by the U.S. Court of Appeals for the Eight Circuit illustrates the importance of following the decision-making procedures of a plan’s governing documents.
The case at hand involves two executives who had executed performance share and restricted stock agreements under their company’s long-term incentive and equity compensation plans. Although the agreements required the executives to be employed for three years to receive the full number of shares awarded under the plans, if they retired or were involuntarily terminated without cause, they would be entitled to pro rata payments of their stock awards.
Following a company transaction and the executives’ transfer to a new location, the two executives terminated employment with the company before the end of the performance period that would entitle them to full vesting of their shares. The executives claimed a pro rata share of their stock under the retirement provisions of the plans. Although the plans and agreements do not define the term “retirement,” an administrative vice president determined that the executives were not entitled to pro rata payments because their terminations did not qualify as retirement. The executives sued the company for breach of contract, and a district court found for the executives, holding that their terminations qualified as retirement under the plans. The court awarded them damages equal to the value of their pro rata shares.
On appeal, the company argued that its determination was entitled to deferential review—that the vice president’s determinations must stand “absent evidence of fraud, bad faith, or a gross mistake in judgment” because the company had discretion and decision-making authority with respect to the awards. The Eighth Circuit disagreed, noting that the agreements and the plan documents grant discretionary authority only to the executive compensation committee (ECC) of the board of directors, and that the ECC neither decided the claims nor delegated decision-making authority to the vice president. Finding that the decision of the vice president therefore was not entitled to deference, the Eighth Circuit upheld the lower court’s award of $749,037 to the executives. (Schaffart v. ONEOK Inc., 8th Cir. 2012)