Reargument Denied in Part Aug. 29, 1952.
See 91 A.2d 57.
[33 Del.Ch. 83] Robert C. Barab, Wilmington, for plaintiff-below, appellant.
Richard F. Corroon (of Berl, Potter & Anderson), Wilmington, and Harmon Duncombe and George Rowe, Jr., New York City, for defendant-below, appellee.
WOLCOTT and TUNNELL, Justices, and RICHARDS, President Judge, sitting.
On the 14th day of March, 1951, the nine members of the board of directors of defendant corporation unanimously adopted what is referred to in Section 130A of the Internal Revenue Code, 26 U.S.C.A. § 130A, as a 'restricted stock option plan'. The plan provided, (1), for granting to seven specified officers of the company, six of whom were members of the board of directors, an option to purchase various designated amounts of the common stock [33 Del.Ch. 84] of the corporation, totalling 24,500 shares, and (2), for setting aside the further quantity of 25,500 shares under options to such officers and key employees of the corporation as a certain committee created especially for the purpose should from time to time, prior to January 1, 1956, designate. The stock necessary for the plan was to come from shares which had been re-acquired or which had been previously authorized but not previously issued. The participants in the plan were to be permitted to buy the stock at such prices as should be fixed by the board of directors, but no option price could be lower than 95% of the highest price at which the company's stock was sold on the New York Stock Exchange on the date of conferring the option in question. The term of the option could not exceed seven years and was subjected to this further limitation:
'The term of the option shall be divided into three approximately equal periods and not more than one-third of the option shares may be purchased during each period, provided, however, if the participant does not purchase the full number of shares to which he is entitled during any such period, he may purchase those shares in any subsequent period during the term of the option.'
The options were made non-assignable and non-transferable, except that in case of the death of any participant, the legal representatives, distributees, or legatees of such decedent were permitted, within three months thereafter, to exercise the option with respect to any shares the participant had been eligible to purchase upon the date of his death.
Any optionee was permitted the right to exercise his option only so long as he remained an employee of the corporation or of one of its subsidiaries, except that if he voluntarily resigned with the consent of the board, or if he became totally disabled, or if he retired upon reaching the normal retirement age under the corporation's plan of retirement, he might, within three months thereafter, exercise the option. Each participant at the time he was granted an option was to execute an agreement containing such terms as the board of directors might deem advisable, provided that they were consistent with the terms of the plan.  The plan [33 Del.Ch. 85] was not to become operative until first ratified by an affirmative vote of the holders of a majority of the outstanding shares of common stock entitled to be voted thereon.
Finally, it was provided that the board of directors might amend or discontinue the plan at any time.
On the 26th day of April, 1951, at a duly noticed meeting of the stockholders, the said option plan was approved by the holders of a majority of the stock. The stockholders were furnished the names of the seven officers with whom contracts for options under the plan had already been made, the number of shares allocated to each, the price per share each of said officers was to pay, and the schedule of waiting and working periods specified in all seven contracts, namely, beginning on January 1, 1952; July 15, 1953; and November 15, 1955, respectively, and ending on March 13, 1958. One of the said seven officers, Ralph W. Lulek, had on January 1, 1950, prior to the formulation of the option plan, entered into a contract of employment securing his services to the corporation on stipulated terms (including a clause reserving a place for him in any future incentive compensation plan) until December 13, 1954. The record does not indicate whether or not the stockholders knew of Lulek's contract. Not any of the other six officers in the plan on the date of the meeting of stockholders was under any employment contract or subsequently entered into any such.
In regard to its purpose, the official draft of the plan begins by this recital:
'The Board of Directors believes that the interests of the Corporation and its stockholders will be advanced by the establishment of a Restricted Stock Option Plan which will provide an incentive to the key executive employees of the Corporation and its subsidiaries, who are responsible for its future growth and development and its continued financial success, to acquire a proprietary interest in the Corporation.'
The proxy statement which management sent out to stockholders with the notice of meeting, after referring to certain provisions of the Revenue Act of 1950 relating to stock options, went on to say:
'In view of this new legislation and in order to provide the key managerial personnel of the Corporation with an opportunity to acquire a greater proprietary interest in the Corporation, the Board of Directors at a meeting held on March 14, 1951, adopted a Restricted Stock Option Plan providing * * *.'
[33 Del.Ch. 86] The option agreements and the minutes of the stockholders' meeting held on the 26th day of April, 1951, contain a similar ...