Lamb v. Emhart Corp.

Decision Date13 February 1995
Docket NumberNo. 724,D,724
Citation47 F.3d 551
PartiesPens. Plan Guide P 23909R Charles E. LAMB, James D'Amore, John F. Bradley, William C. Munroe, on behalf of himself and all other persons, Plaintiffs-Appellees, v. EMHART CORPORATION, B & D Inc., and Black & Decker Corporation, Defendants-Appellants. ocket 94-7575.
CourtU.S. Court of Appeals — Second Circuit

Erin M. Kallaugher, Hartford, CT (Mark B. Seiger, Halloran & Sage, of counsel), for plaintiffs-appellees.

Dennis O. Brown, Hartford, CT (David G. Hetzel and Mary L.B. Betts, LeBoeuf, Lamb, Greene & MacRae, of counsel), for defendants-appellants.

Before: MINER, JACOBS and PARKER, Circuit Judges.

PARKER, Circuit Judge:

Plaintiffs-Appellees John Bradley and Charles Lamb brought this action in the District of Connecticut for damages arising out of an alleged breach of contract. 1 Following a bench trial before Judge Alan H. Nevas, judgment was entered for the Plaintiffs. Defendants Emhart Corporation et al. appealed, contending that the District Court erred in finding that certain amendments to its employees' Stock Option Plans adopted by Emhart on December 22, 1988 applied to options held by the Plaintiffs at the time of their separation from Emhart, and that Emhart had failed to meet its burden to prove the elements of accord and satisfaction. We now uphold the decision of the District Court.

BACKGROUND

Plaintiffs are former employees of Emhart Corporation. In November 1988 both men were notified that due to corporate reorganizations which had eliminated their positions they were to be terminated effective January 31, 1989. At the time, Bradley, who had worked at Emhart for 19 years, was President of the Hardware Division and Lamb, who had worked at Emhart for three years, was Director of Advanced Engineering and Manufacturing Technology.

The Termination Agreements

In early December 1988 both men signed Termination Agreements enumerating the benefits they would receive upon their termination. The Termination Agreements described benefits such as severance pay, extended medical coverage, pension benefits, accrued vacation pay, and access to the Emhart Employee Assistance Program and career management counseling. The Termination Agreements also provided that:

Any rights which you may have following your separation date under outstanding stock options granted to you will be determined in accordance with the terms of the respective stock option plans under which the options were granted and in accordance with the terms of the respective option agreements evidencing such stock options.

The Termination Agreements thus incorporated by reference Emhart's Stock Option Plans ("Plans") and Stock Option Agreements ("Agreements") pursuant to which Bradley and Lamb had been granted stock options. 2

The Stock Option Plans and Agreements

The Stock Option Plans and Agreements expressed Emhart's intention to provide selected key employees with additional incentives in the form of stock options. The Plans provided that they were to be administered by the Management Compensation and Stock Option Committee of the Company's Board of Directors. Under section 13 of the Plans the Committee was authorized to designate any options as "Incentive Stock Options" ("ISOs") entitled to preferential treatment under Sec. 422A(b)(6) of the Internal Revenue Code. Section 13 expressly provided that "the provisions of the Plan as they relate to ISOs shall be construed to effectuate such purpose."

Each employee who was granted options under the Plans signed an Emhart Corporation Option Agreement, agreeing to be bound by its terms. The Agreements provided that options were exercisable subject to all of the terms of the Plans, "including without limitation the power of the Committee (as defined in the Plan) to construe and interpret the Plan and to hereafter establish and amend rules and regulations for its administration." The employee/optionee also agreed to remain in the employ of Emhart for a period of not less than one year from the date of the Agreement.

Each Agreement further provided that portions of the options granted became exercisable at the end of each successive year of employment. Lamb and Bradley's options became exercisable as follows:

                                            Percentage of Shares
                After                       Covered by Agreement
                One year from the
                date of this agreement              25%
                Two years from the
                date of this agreement       An additional 25%
                Three years from the
                date of this agreement       An additional 25%
                Four years from the
                date of this agreement       An additional 25%
                

Section 6 of the Plans, entitled "Terms and Conditions of Options," contained provisions outlining the terms under which options could be granted. Under section 6(g), "Agreement to Serve," each employee granted an option agreed to serve, in the employ of Emhart Corporation or its subsidiaries, for at least one year from the date of that grant. Section 6(e), "Termination of Employment," provided:

Upon termination of an option holder's employment, for any reason other than death or deliberate, willful, or gross misconduct, his option shall be exercisable only to the extent he would have been permitted to purchase shares under his option at the date of such termination, and such option shall expire unless exercised within the three (3) month period following the date of such termination....

Section 6(e) contained an ambiguity which became important in light of the facts of this case. It did not clearly set forth the rights of an option holder as to shares covered by portions of options which were not exercisable at the time of separation from employment, but which became exercisable within three months of separation. Lamb and Bradley understood section 6(e) to mean that they continued to hold all of the portions of their options, whether exercisable or not, for the three month period following their separation from Emhart (January 31, 1989--April 30, 1989). At trial, Emhart contended that section 6(e) was not intended to be read that way, and that it was the company's practice to cancel all portions of options not exercisable at the time of an employee's termination. The District Court, however, construed section 6(e) in accordance with the Plaintiffs' understanding.

Under section 10 of the Plans, Emhart's Board of Directors was authorized to terminate or amend the Plans at any time, subject to certain controls. In particular, the Board was not permitted to make any change to options previously granted without the consent of the respective holders thereof. Option holders were thus protected from any Board action that might be undertaken against their interest.

The Change in Control Amendments

In mid-1988 the Board of Directors of Emhart together with senior executives, outside counsel and the Compensation Committee began to discuss amending the Plans to include a change in control provision. Emhart's officers favored an amendment because of changes in the tax laws and because they worried that Emhart was susceptible to takeover attempts. The purpose of the change in control provision was to encourage senior executives to remain at Emhart even under the threat of a hostile takeover, by insuring that employees who had outstanding options at the time of a takeover would be able to realize the full value of options they held, by having them accelerated. On December 22, 1988 the Board accordingly voted to amend the Plans, adding section 6(i), "Effect of a Change in Control," which made all outstanding options immediately exercisable in the event of a change in control of the company. 3 At the same time the Board also passed a directive to insure that Agreements evidencing outstanding options would be amended to correspond with the newly On February 24, 1989 a letter was sent to all option holders whose Agreements Emhart believed had been affected by the Amendments. The letter explained the effect of the Amendments on the Plans and Agreements and requested the consent of each option holder as required by section 10 of the Plans. Lamb and Bradley did not receive this letter, and thus never consented to amendment of their Agreements.

amended Plans. 4

The Merger

On March 19, 1989 Emhart entered into an Agreement and Plan of Merger with Black & Decker Corporation and B & D, Inc. Both the Merger Agreement and the Schedule 14D-9, filed with the SEC, stated that each Emhart stock option outstanding on the date of the merger would become fully exercisable on the date of the merger, whether or not it had previously been exercisable. On April 4, 1989 Richard F. Vitkus, Senior Vice-President of Emhart, addressed a memo to all Emhart stock option holders stating:

The merger agreement between Emhart and Black & Decker provides that immediately following Black & Decker's purchase of Emhart shares under the Tender Offer, all outstanding Emhart stock options, whether or not currently exercisable, will become fully exercisable and vested, and the option holders will be entitled to receive an amount of cash for each option share equal to the "spread" between the option exercise price and the Tender Offer price of $40 per share.... Because all options are being cashed out in this manner, it will not be necessary to exercise your options.

(Emphasis in original.) Bradley and Lamb each received this memo.

Black & Decker purchased the shares of common stock of Emhart Corporation pursuant to the tender offer and triggered the Change in Control Amendment on April 28, 1989. The facts as they relate to Lamb and Bradley at that time were:

1. They had signed Termination Agreements in early December 1988.

2. At that time each held stock options granted by virtue of their length of service.

3. The Termination Agreements incorporated the terms of the Stock Option Plans and provided that rights in the stock options outstanding after separation would be dictated by the Plans,...

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