Opinion ID: 689128
Heading Depth: 2
Heading Rank: 3

Heading: Treatment of Unvested Portions of Options

Text: 49 Emhart argues that those portions of Lamb's and Bradley's options which had not vested were not outstanding at the time of the merger and thus not subject to the Change in Control Amendments. In support of this contention Emhart claims, first, that Emhart's own practice of cancelling the unvested portions of terminated employees' options was proper and, second, that the District Court misinterpreted the Internal Revenue Code. 50 Emhart claims that any rights that Lamb and Bradley may have had with regard to unvested portions of options were cancelled on the date of their terminations. Emhart relies on the language of section 6(e) of the Plans, arguing that it demonstrates that a terminated employee would be able to exercise his option only to the extent that he had vested portions on the date of his termination. Emhart states that it was standard practice, both of Emhart and in the industry generally, to cancel all unvested portions of options on the date of termination. The District Court, however, disagreed: 51 Section 6(e) first recognizes the overall character of the option as the entire bundle of shares and then narrows it, distinguishing between exercisable and unexercisable shares in order to inform an optionee what he may purchase within the three months following his termination. The Section then reverts to the overall bundle of shares construction with regard to expiration. 52 Emhart's corporate counsel testified that he could understand such a reading of section 6(e), and both he and a Senior Vice President testified that the section did not specifically state that any unexercisable portions of options were to be cancelled upon termination. [W]hen two or more meanings may fairly be given to language in a contract, the language is to be construed against the one who drew it. Sturman v. Socha, 191 Conn. 1, 9, 463 A.2d 527, 531 (1983). The District Court correctly interpreted this provision against the one who drew it, Emhart, and in favor of Lamb and Bradley. Accordingly, the unvested portions of Plaintiffs' options were outstanding at the time of their separation from Emhart. 53 The District Court further found that Sec. 422A of the Internal Revenue Code, 9 as incorporated into the Plans and Agreements, required that incentive stock options granted to Emhart employees were to be considered outstanding until they were exercised in full or the limitation periods set forth in the Plans had expired. Relying on this finding, the District Court held that Plaintiffs' entire stock options were outstanding at the time of the merger and should have been accelerated as all other outstanding options were. 54 Section 13 of the Plans authorized the Committee to grant stock options pursuant to Sec. 422A. Section 13 expressly provided that all of the provisions of this Section 13 and the provisions of the Plan as they relate to ISOs [incentive stock options] shall be construed to effectuate such purpose. Section 422A required that options meet certain criteria to qualify for favorable tax treatment as incentive stock options. One of the requirements of Sec. 422A was that options could not be exercisable while any pre-existing ISOs were outstanding. See 26 U.S.C.A. Sec. 422A(b)(7). Section (c)(7) of Sec. 422A defined outstanding: 55 For the purposes of subsection (b)(7), any incentive stock option shall be treated as outstanding until such option is exercised in full or expires by reason of lapse of time. 56 Complying with the requirements of Sec. 422A(b)(7), section 13(b) of the Emhart Stock Option Plans provided: 57 An ISO granted to an employee shall not be exercisable while there is outstanding (within the meaning of Section 422A(c)(7) of the Code) any incentive stock option (as defined by Section 422A of the Code) which was granted to such employee before the granting of such ISO to purchase stock in his employer corporation or stock in a corporation which (at the time of the granting of the ISO) is a parent or subsidiary corporation of the employee's employer corporation or in a predecessor corporation of any of such corporations. 58 Emhart argues that the definition of outstanding in Sec. 422A(c)(7) was intended only for the purpose of (b)(7). However, the language of section 6(e) 10 of the Plans, which deals with the expiration of terminated employees' options by lapse of time, must be read in conjunction with section 13 of the Plans, which incorporates Sec. 422A(c)(7) in order to define and construe the substantive rights of option holders under the Plans. All of these provisions read together indicate that terminated employees' entire options remain outstanding until three months after termination, when they expire by lapse of time. Accord and Satisfaction 59 Emhart contends that the evidence establishes that Plaintiffs' acceptance of their cash out checks constituted an accord and satisfaction. In order to prove an accord and satisfaction, the defendant must show that at the time of the agreement a good faith dispute existed over the existence of a debt or over an amount owed, and that the debtor and the creditor negotiated a contract of accord to settle the claim. Peerless Hosiery Co. v. Northern Ins. Co., 108 F.Supp. 52, 55-56 (D.Conn.), aff'd, 199 F.2d 957 (2d Cir.1952); County Fire Door Corp. v. C.F. Wooding Co., 202 Conn. 277, 281, 520 A.2d 1028, 1030 (1987). The accord must be a new agreement based on new consideration. Crucible Steel Co. of America v. Premier Mfg. Co., 94 Conn. 652, 656, 110 A. 52, 55 (1920). The proponent must be able to show that there was a meeting of the minds, and that the offer by the debtor was clearly tendered as full satisfaction of the debt, and the payment was knowingly accepted. Crucible Steel Co., 94 Conn. at 656, 110 A. at 55; County Fire Door, 202 Conn. at 281, 520 A.2d at 1030; Gillis v. Gillis, 21 Conn.App. 549, 552, 575 A.2d 230, 231-32, cert. denied, 215 Conn. 815, 576 A.2d 544 (1990). 60 Judge Nevas correctly found on the evidence that there was no accord and satisfaction between Emhart and Lamb or Bradley. There was no evidence at trial that the cash out checks were intended as a new contract between the company and Lamb or Bradley. There was also no evidence that a dispute existed between the two parties at the time the checks were cashed. Several witnesses from Emhart testified that the company was in fact surprised when Lamb and Bradley disputed the amount of their checks. Lamb and Bradley both testified that at the time they received their checks they believed that the checks did not fully satisfy the company's debt to them, but they assumed the matter could be resolved. Both Lamb and Bradley testified that they had no knowledge that cashing the check would extinguish their rights. 61 Emhart relies heavily on County Fire Door Corp. In that case the Connecticut Supreme Court held that even expressly reserving the right to protest on the face of the check would not defeat an accord and satisfaction if the other elements were met. 202 Conn. at 290, 520 A.2d at 1035. However, in that case the dispute between the parties as to amount owed had existed for some time, the check expressly stated that it was in full satisfaction of the debt, and the creditor knew that it might lose its right to protest by cashing the check as was evidenced by its attempt to reserve those rights. Here, in contrast, the evidence shows that no dispute existed at the time the checks were cashed, there was no meeting of the minds, and Lamb and Bradley did not knowingly accept their checks as full satisfaction of the debt Emhart owed to them. Accordingly, we agree with the District Court that Emhart failed to meet its burden to prove the elements of the affirmative defense of accord and satisfaction.