Pension & Benefits News Former DuPont employee not entitled to stock options where he failed to meet plan definition of “retirement”
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Wednesday, April 8, 2020

Former DuPont employee not entitled to stock options where he failed to meet plan definition of “retirement”

By Pension and Benefits Editorial Staff

Affirming summary judgment for DuPont, the U.S Court of Appeals in Atlanta (CA-11) held the word “retirement” in the company’s Award Terms of stock options included both age and years-of-service requirements where the terms referred to the specific definition of retirement in the pension plan. Thus, a former employee who left the workforce at age 67 after working for DuPont for 10 years did not meet the years-of-service requirement and, therefore, was not entitled to stock options that he failed to exercise by his last day of employment.

Incentive plan. DuPont’s Equity and Incentive Plan allows the company’s Compensation Committee to grant performance-based compensation in the form of stock option awards. It affords the committee complete discretion to interpret the terms of any stock option award and selects Delaware law to govern the plan. The Award Terms, the contract evidencing a stock option award, fixes the expiration date of an award. An employee usually has seven years from the time of the award to exercise the options. However, the expiration date might accelerate if an employee leaves DuPont for a reason other than “retirement” as defined by reference to the Pension Plan. The plan describes four types of retirement with each requiring either 15 or 25 years of service with DuPont.

Stock options. The employee began working for DuPont in 2005 and was granted several stock options. He left the workforce at the age of 67 after working for DuPont for a little over 10 years. By the end of his last day of employment, he had not exercised any of the stock options and later learned the options had expired. DuPont reviewed the matter and explained to the employee that the expiration date of the stock options accelerates when an employee leaves and does not qualify for retirement, as that word is defined by the Award Terms. Because he left without exercising his stock options and did not qualify for retirement, his stock options expired on his last day of employment.

Lower court. The employee sued to reinstate his stock options, arguing the Pension Plan contained no express definition of “retirement,” so the word carried its ordinary meaning. DuPont disagreed and argued the Pension Plan defined retirement and all four definitions required an employee to work for DuPont for a minimum of 15 years. Both parties moved for summary judgment; the district court granted summary judgment to DuPont. The court deferred to the Compensation Committee’s interpretation as explained by DuPont’s former manager of global benefits strategy and ruled DuPont acted in good faith because the evidence established it consistently interpreted the Award Terms to refer to the Pension Plan. The district court also rejected the ordinary definition of retirement because the Award Terms stated that “retirement” had a specific meaning, which was defined in the Pension Plan.

Choice of law. As a threshold matter, the court found Delaware law governed its analysis because the Equity and Incentive Plan contained a choice-of-law provision that selected Delaware law. Georgia law ordinarily honors choice-of-law provisions, and the employee offered no evidence that Delaware law was contrary to Georgia public policy or bore no substantial relationship to the parties or transaction. Thus, the court applied Delaware’s “objective theory of contracts” to its analysis.

Definition of “retirement”. Noting that Delaware courts usually give words their ordinary meaning only if the parties express no contrary intent, the court found the word “retirement” as used in the Awards Terms and Pension Plan included both age and years-of-service requirements. The court rejected the employee’s definition contained in a dictionary, noting that “Delaware courts have explained that the ordinary meaning of a term does not apply when the contract provides a specific definition.” Here, the Award Terms stated that “retirement” was defined in the applicable pension plan. That reference to the plan for the definition made clear that “retirement” carried a “special meaning” distinct from the ordinary definition.

Furthermore, the employee admitted his proposed definition would allow for irrational results. Under that definition—”Termination of one’s own employment or career, especially upon reaching a certain age or for health reasons”—an employee who exited the workforce after one week of employment with DuPont would be considered retired.

Because the employee’s 10 years of service fell short of the years-of-service requirement in the plan’s definition, the court affirmed the district court’s grant of summary judgment to DuPont.

Source: Bearden v. E.I. DuPont De Nemours and Company (CA-11).

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