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Courtright v. B.N.Y. Holdings

MON-C-225-95 (N.J. Super. Ch. Div., 1997) (Unpublished)

STOCK OPTIONS; BUSINESS JUDGMENT RULE—Under state law, a company is protected by the business judgment rule in deciding which employees would be granted acceleration in the vesting of stock options and which employees would not be granted the same benefit.

A company adopted a stock option plan and subsequently merged. The new company instituted a plan to accelerate the vesting schedule for some option holders, but not others. Two employees who were not permitted to participate in the acceleration plan, and were later fired, brought suit alleging: (1) the stock option plan of the new company was subject to state law prohibiting discrimination among persons holding stock option rights; (2) they had a reasonable expectation they would receive the benefits of accelerated vesting as a form of severance pay; (3) the compensation committee and the board of directors of the new company breached their fiduciary duty to act in good faith under the option plan by picking and choosing which employees would be granted accelerated vesting; and (4) the officers of the new company violated the implied covenant of good faith and fair dealing under the contract signed by the plaintiffs as part of their participation in the option plan. The company moved for summary judgment

In granting the company’s motion, the Chancery Court first stated that, until vested, the option plan conferred no right to any stock options and was really a form of bonus. The Court held that the new company was not discriminatory in its application of the option plan and the employees had no reasonable expectation of being included in the acceleration plan. Nothing in the stock option plan required all participants to be treated in exactly the same fashion, and the company could freely include or exclude anyone. The new company had no fiduciary duty to grant acceleration rights to all option holders and was acting in accordance with its business judgment when deciding to whom to grant acceleration rights. Furthermore, the company did not deprive the plaintiffs of any rights they had under the option plan. The Court then analyzed the claim of breach of the implied covenant of good faith and fair dealing under the contract creating the option plan. This covenant states that neither party shall do anything which injures the right of the other party to receive the fruits of a contract. However, the company had the right, under a separate contract, to terminate the plaintiffs, thereby terminating their rights to receive the stock options. The Court stated that the implied covenant of good faith and fair dealing in the stock option contract cannot supercede, or even alter, the right of the company to act under the terms of another contract.


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