Unvested Stock Options: Left Behind?
A lawsuit by a former Fidelity Investments CFO raises the question of
what happens to unvested stock options in a layoff.
What
would prompt a longtime, well-respected CFO to sue his former employer after
being let go?
In Mark Sullivan's case,
it's unvested stock options.
In
a complaint filed in June in a Massachusetts
court, the former EVP and division CFO for privately held Fidelity
Investments contends that the mutual-fund giant should be compensating him
for 975 options that vested a year after he was let go, and for another 2,900
that will vest between the end of this year and 2012. The complaint doesn't
specify what the options are worth, and Sullivan is seeking "damages, to
be determined at trial," according to the document.
Sullivan's
attorney did not respond to questions seeking an estimated value for the
options or the amount of any potential award. Sullivan, now CFO at
Boston-area software maker Aspen Technology, also declined to comment through
his attorney.
In
general, employees who leave a company voluntarily or for performance-related
reasons have no hope of recovering the value of unvested options. "If
the objective is retention, allowing access to them after they leave defeats
the purpose," says Doug Friske, head of Towers Watson's global executive
compensation consulting practice.
However,
there are few standard practices regarding the fate of unvested options when
an executive is laid off or otherwise let go for reasons not considered
"for cause," experts say.
Normally,
the legal documents governing the options would not provide for continued
vesting or a cash-out of the unvested options, says Andrew Graw, partner and
head of employee benefits and executive compensation for law firm Lowenstein
Sandler, and an employee would typically have another 90 days or so to
exercise any options that had already vested.
But
employers have some discretion in the matter, so some may use the unvested
options as part of a general severance package, sometimes accelerating
vesting schedules or allowing for continued vesting during a specified
period, says Graw. They may also extend the length of time during which a
former employee can exercise vested options.
Employee
lawsuits aimed at recovering the value of unvested options generally have
little chance of succeeding, regardless of the departure circumstances, since
the employer is under no obligation to offer it. Sullivan may have a stronger
case than most, though, since his lawsuit claims that the stock-option plan
documents in question "do not contain any term that requires a
participant to be a Fidelity employee at the time of vesting in order for his
or her shares to vest," according to the complaint.
Fidelity,
for its part, says its "incentive share programs have many aspects to
them that weren't addressed accurately in the lawsuit," according to
company spokesman Michael Shamrell. He declined to comment further, but said
the company believes "the claims in this lawsuit have no merit and we
intend to defend against it vigorously."
Sullivan,
who started with the firm in 1994 as director of corporate reporting, climbed
up the corporate ladder to become CFO of the company's employer services
division in 2001. According to the complaint, he was later named EVP,
becoming one of only three people to hold that title in the finance
organization. Between 2006 and the end of 2008, when his employment was
terminated, Sullivan was leading a cost and profitability initiative,
reporting to Fidelity's corporate CFO.
Fidelity
redeemed the 2,000 shares that had vested when Sullivan left at the end of
2008. The complaint doesn't specify why he was let go or challenge that
decision in any way.
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