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Frega v. Valley National Bancorp

A-5931-00T2 (N.J. Super. App. Div. 2002) (Unpublished)

CONTRACTS; DISCRETION— When an employee agrees in a stock option plan that all determinations and interpretations are to be made by the company’s directors and are therefore binding and conclusive, the employee cannot later object to those decisions, even if they are arbitrary.

A bank granted stock options to one of its senior vice presidents. About eight months earlier, it had converted from a mutual savings association to a shareholder-owned company. As a result, it became subject to the regulations of the federal Office of Thrift Supervision. Consequently, not only did amendment of the vesting requirements in the stock option plan require shareholder approval, but federal regulations imposed a one year waiting period before that approval could be requested from the bank’s shareholders. In anticipation of being acquired, the bank prepared to adopt a plan that would cause all option grants to become immediately vested upon a takeover of the bank. Before shareholder approval was obtained, the bank reached a merger agreement with another bank. That agreement provided that the acquired bank’s stock option plan be free of accelerated vesting except in the case of disability or death. Further, the acquired bank represented that there was no acceleration of vesting. Shortly after the merger took place, the senior vice president resigned his executive position to go to another bank. Then, about three weeks later, he notified the acquiring bank that he wished to “immediately exercise all of my options” which he claimed were exercisable in full because the acquired bank’s board of directors had approved an acceleration plan. The acquiring bank denied his request, citing the rules of the Office of Thrift Supervision which required the one year wait for such amendments to stock option plans. Further, the acquiring bank pointed out that the plan under which the executive had received the stock options did not provide for accelerated vesting in the event of a change of control. And, importantly, the acquiring bank pointed out that under the terms of the stock option grant, the former executive “agreed that all decisions, determinations and interpretations of the Board of Directors or the Committee in respect of the Plan, shall be final and conclusive.” The board of directors expressly decided that there had been no acceleration of the Plan and therefore, according to the acquiring bank, that decision was final and conclusive. The employee filed suit, arguing that shareholder approval was not necessary because the applicable “regulation only cover[ed] options granted within the first year of conversion, and the revised plan took effect after that time.” Further, he claimed that the applicable regulation covered only statutory stock options while the plan in question only involved non-statutory stock options. When the matter reached the Appellate Division, the acquiring bank prevailed. The Court found “the original plan indicated that all determinations of the compensation committee were ‘binding and conclusive’ on all participants. In addition, the committee was permitted to determine the time at which the stock options could be exercised ‘in its sole discretion.’ Even under the revised plan, acceleration of vesting of the options upon a change in control was subject to the caveat that the committee could determine otherwise. In addition, [the former executive’s] own stock option agreement provide[d] that [he] ‘acknowledge[d] that all decisions, determinations and interpretations of the ... Committee ... in respect of the Plan and this Incentive Stock Option Award Agreement shall be final and conclusive.’” Consequently, the Court noted that the compensation committee had been given wide discretion and its decision to deny the acceleration request “was not arbitrary based on the language of the [] stock option agreement and the revised plan, which gave the committee final authority to determine whether the acceleration of vesting of the stock options should take place.” Consequently, the Court had no need to interpret the regulations of the Office of Thrift Supervision.

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