More Lawsuits Involving Stock Compensation

Back in January, this blog looked at some recent lawsuits of interest involving stock compensation. In recent months, a few additional court decisions involving equity comp have caught our attention.

Online Grant Acceptance

Electronic distribution and acceptance have become common procedures for stock grants. Occasionally lawsuits challenge these, often when the agreement has a provision that restricts an employee who later contends that he or she did not see it or agree to it (e.g. a covenant not to compete). That's what happened in ADP v. Lynch, in which the US Court of Appeals for the Third Circuit upheld a lower court's decision enforcing restrictive covenants in electronically delivered grant agreements. In the company's online procedure, employees needed to check boxes confirming that they had reviewed the documents, which included the plan, the award agreement, and the noncompete. The first page of the grant agreement also specifically told employees that acceptance of the award depended on their agreeing to the noncompete. The court found that by checking the box affirming their reading of these documents, employees agreed to the provisions. It rejected as irrelevant the contention that the employee did not recall doing so and was not adequately informed about the consequences of accepting the grants.

This case is a clear warning that you need to read and understand the provisions in your grants agreement and stock plan. Plus, don't assume that the provisions in new grants you receive are identical to the provisions of prior grants. For more on restrictive covenants in stock grants, including this case and others, see the myStockOptions article Watch For Noncompetes And Other Restrictive Covenants In Stock Grant Agreements.

Divorce

Like other assets and forms of compensation, stock comp sometimes gets dragged into divorce property settlements and alimony payments, though the issues can be more complex. In the case Ludwig v. Lamee-Ludwig, the Massachusetts Court of Appeals looked at the question of whether unvested shares are considered assets for the property settlement and/or income for child care/alimony. The court confirmed a lower court's decision that the calculation of an employee spouse's alimony obligation may include income received from unvested employee stock options that were not subject to equitable division as assets, under application of the "time rule" in Baccanti v. Morton (434 Mass. 787, 2001), for dividing unvested grants. This would not constitute "double counting" if the income were included in determining the husband's alimony or child support. At his blog, divorce attorney Jason Owens discusses the importance of this case, which in his view offers "precision" for treating unvested options not divided under the property settlement (Treating Stock Options And RSUs As Assets Vs. Income In A Divorce).

For more details on the treatment of restricted stock and stock options in an divorces, see the articles and FAQs in the Life Events: Divorce sections of myStockOptions.com.