A decision on 16 November 2010 made by the United States appeals court for the Eleventh Circuit emphasises the importance of drafting stock-based compensation plan documents that clearly reflect the intent of the parties.
In Graphic Packaging Holding Co. v. Humphrey, the employer sought repayment for amounts that it allegedly overpaid its executive in the cash settlement of his restricted stock unit (RSU) award. The employer originally paid the executive based on the value of the employer’s stock on the executive’s retirement date, but later claimed that it should have used the payment date instead as the valuation date. Because the executive was a “key employee” for purposes of Internal Revenue Code (IRC) Section 409A, the payment date was required to be delayed for six months following the executive’s retirement date. Incidentally, the value of the employer’s stock had dropped during the six-month delay. Both the applicable stock plan and the RSU award agreements were silent as to whether the valuation date should be the payment date or the retirement date. The employer’s compensation committee, which had the authority under the terms of the plan to interpret the plan, determined that the proper valuation date was the payment date. Nevertheless, the court held that the employer did not produce evidence to show that the valuation date should be the payment date instead of the retirement date, and the executive was not required to repay any of the amounts he received.
In light of Graphic Packaging, employers should make sure to clarify in applicable plan documents the valuation date for stock-based compensation awards that are settled in cash, especially where IRC Section 409A may apply to delay payment.