Action by minority stockholder to enjoin corporation from recognizing stock option agreements authorizing seven officers of corporation to purchase stock therein on specified future dates. The Court of Chancery, Seitz, Chancellor, held that the evidence failed to show insufficiency of consideration for option agreements in view of necessity for optionees to remain in employ of corporation in order to exercise options and other relevant circumstances.
[34 Del.Ch. 85] Robert C. Barab, Wilmington, for plaintiff.
Richard F. Corroon, of Berl, Potter & Anderson, Wilmington, Harmon Duncombe and George Rowe, Jr., New York City, for defendant.
This is the decision after final hearing in an action by a minority stockholder seeking to enjoin the defendant corporation from recognizing certain stock option agreements entered into with seven corporate officers under a stock option plan. The options in question were authorized by the directors and ratified by a majority
of the stockholders at the time the option plan itself was also ratified.
This case was originally before this court on cross motions for summary judgment. This court denied both motions. Later, on the basis of a stipulation, this court, without opinion, granted defendant's motion for summary judgment. Thereafter plaintiff appealed and on [34 Del.Ch. 86] the basis of some three opinions of the Supreme Court the case was remanded to this court for trial.
I first consider plaintiff's contention that the requirement for continued employment was not in fact the consideration for which defendant bargained and so cannot form the basis for finding that it constitutes consideration here. Defendant takes the position that in view of the limited scope of the remand, as gleaned from the various Supreme Court opinions, the plaintiff should not now be permitted to argue this point. Since it is doubtful that the Supreme Court intended to foreclose this related argument, I prefer to consider it on its merits.
Plaintiff points to certain recitals in the Plan, in the option agreements issued under the Plan and in the proxy statement issued in connection with the stockholder action thereon. These recitals make it clear that the corporation was taking advantage of the new tax law governing stock options and was giving the optionees an opportunity to acquire a proprietary interest in the corporation. The oral testimony tends to corroborate the various recitals. Plaintiff goes on to argue from these premises that he record fails to reveal that the defendant bargained for anything else. My difficulty is that I do not see how one can talk about ‘ bargaining’ over the things plaintiff mentions. The change in the tax law was merely the occasion for the adoption of the Plan and clearly such a Plan is intended to give the optionees an opportunity to buy stock.
As I read the Supreme Court opinions in this case, the Court decided that the option agreement requirement that the optionee remain with the company to a fixed future date in order to avail himself of the right to exercise the option as to the first installment of shares and until two later dates for the other two installments, constituted legal consideration. The question of its sufficiency is decided later herein. Certainly this court cannot say that the corporation did not bargain for this continued employment as the legal consideration for the granting of the options when that very legal consideration is [34 Del.Ch. 87] made an explicit and very important part of the option agreement. I therefore conclude that continuing as an employee at least until the fixed future dates was in fact the legal consideration for which the defendant bargained.
Plaintiff next advances four reasons why the defendant corporation received no recognizable exchange for the options. Let us consider them.
(1) Plaintiff says the record shows that the optionees were already exerting their maximum efforts on behalf of the company before the Plan was conceived. The term ‘ maximum effort’, especially as applied to management personnel, is a highly theoretical expression. As a practical matter, and within reason, there is always room for some additional incentive. But in any event, additional incentive compensation may be justified as a means of ‘ insuring’ continued maximum effort. Incentive is an intangible ...