Consolidated Engineering Corp. v. Nesbit, 12582-12584.
| Decision Date | 10 October 1951 |
| Docket Number | No. 12582-12584.,12582-12584. |
| Citation | 102 F. Supp. 112 |
| Court | U.S. District Court — Southern District of California |
| Parties | CONSOLIDATED ENGINEERING CORP. v. NESBIT. CONSOLIDATED ENGINEERING CORP. v. COLVIN. CONSOLIDATED ENGINEERING CORP. v. BRADBURN. |
Latham & Watkins, Austin H. Peck, Jr., Los Angeles, Cal., for plaintiff.
Willis Sargent and Sidney H. Wyse, Los Angeles, Cal., for defendants.
The plaintiff in the above entitled actions had among its personnel some sixteen key employees. Being unable to pay its employees additional compensation to induce them to remain in the employ of plaintiff corporation in such key positions, in lieu thereof the corporation gave to each of its sixteen key employees an option agreement, covering a period of five years, which gave to these key employees the right to purchase, at a price of $5.00 per share, certain shares of plaintiff corporation's common capital stock, having a par value of $1.00 per share.
Among other things, it was provided that the option agreement should not be effective for any purpose unless and until proper permits were obtained from the Commissioner of Corporations of the State of California, authorizing the granting by said corporation of the options and authorizing the issuance of the stock of plaintiff corporation pursuant to the provisions of said options; and the options were terminated if these employees did not remain in the service of plaintiff corporation.
Plaintiff filed petitions with the Corporation Commissioner of the State of California, asking for authority to grant the options herein mentioned and to issue the stock, if and when the options were exercised. The petitions were granted by the Corporation Commissioner.
There is nothing in this case to indicate that defendants were anything but conscientious, honest employees. They were in no respect stock market manipulators. Evidence in the case indicates that the idea of the stock option contracts originated with Philip S. Fogg, President of Consolidated Engineering Corporation, prior to the listing of plaintiff's stock on any national exchange, as a means of retaining the services of the sixteen key men and as incentive to these men to use their best efforts for the benefit of the corporation. Included among the sixteen were the three defendants in these actions, they being the only employees holding the conventional titles of officers of the corporation.
At the time the option agreements were executed they had little value. After the options acquired a value (because of the rise in value of the stock) a meeting of the optionees was called by Mr. Fogg, at which meeting the tax problem incident to the exercise of the option agreements was brought to the attention of the option holders and suggestion was made that they be exercised annually to lessen the impact of tax accruing upon exercise of an option. The fact that optionees did not have additional resources sufficient to pay the tax and purchase stock, without concurrently selling a portion of their purchased stock, was discussed at the meeting. It was then made known to the optionees that they could (through a brokerage house of which one of the directors of plaintiff corporation was a partner) effect sales of stock in order to procure funds to take up their options.
The various employees commenced taking up options, in most cases using the forms prepared or suggested by plaintiff corporation. At no time from the date of the first listing of the stock on an Exchange to the date of the filing of the actions herein did the management of the corporation, or anyone else, issue any bulletin, circular, letter, notice or any other document, calling the employees' attention to restrictions upon them under the Securities Exchange Act relative to purchase and sale of stock within the six months' period.
Subsequent to the making of the option agreements, the stock of Consolidated Engineering Corporation was listed upon a Stock Exchange and thereby came under the provisions of the Securities Exchange Act, 15 U.S.C.A. § 78a et seq. After the purchase and sale of the stock which is the subject matter of these actions one, Pellegrina, a stockholder of plaintiff corporation, demanded that plaintiff corporation commence an action under Title 15, § 78p(b), to recover for the corporation the profits realized by defendants.
It appears that Pellegrina purchased ten shares of plaintiff corporation's stock in September, 1950, and within two weeks or a month after said purchase made demand that the corporation institute suits against the defendants named...
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