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Severance terms extinguished exec’s right to shares, options

The terms of a software company executive’s severance agreement completely extinguished rights to preferred shares and stock options granted during the periods of his employment, the Massachusetts Appeals Court has found.

The plaintiff argued that a general release of claims in his severance agreement, when read in context with other provisions, was ambiguous and unenforceable with respect to his rights to shares and stock options.

But the Appeals Court disagreed, reversing in part a Superior Court judgment that included a jury verdict holding the defendants liable for refusing to honor the plaintiff’s exercise of 1,000 stock options.

“Simply put, the plain language of the release is only susceptible of one reasonable interpretation: barring something to the contrary elsewhere in the severance agreement, [the plaintiff] released all rights to the preferred shares and stock options,” Judge William J. Meade wrote for the unanimous panel.

The 13-page decision is MacDonald v. Jenzabar, Inc., et al.

‘Pristine example’

Connecticut lawyer Michael D. Blanchard represented defendant Jenzabar, a Boston tech company. Blanchard said the court’s decision was a “pristine example” of the application of Massachusetts law regarding releases as interpreted by the Supreme Judicial Court.

“There are rules of interpretation that require, when you have a general release, there can only be an exception if it is expressly stated,” Blanchard said. “There was none here.”

Counsel for the plaintiff, Colin R. Hagan of Chelsea, pointed to language in a confidentiality clause in the severance agreement as “basically affirming” the continuing existence of his client’s stock option rights.

“We think it is clear that the [general release] did not release [the plaintiff’s] vested property interests,” Hagan said. “To the extent there is any claim it did release or forfeit those options, we would point to the trial court’s decision that there is an inherent ambiguity in the document.”

But Marblehead attorney Mark M. Whitney, who drafts and negotiates severance, noncompete, stock option and other agreements for companies and counsels executives regarding such matters, said he has learned over the years that merger clauses in severance agreements are “deadly.”

“Basically, any [right] that’s not specifically carved out is going to be extinguished,” he said.

While Whitney said he agreed with the Appeals Court on the issue of the plaintiff’s preferred shares, he said he was “troubled” by the court’s treatment of the confidentiality clause in the severance agreement. Under the language of the clause, the plaintiff agreed to an “egregiously long” five-year noncompetition period, with his right to stock options in addition to his service as a senior executive referred to as apparent consideration, he said.

“It appears the court was willing to allow the five-year restrictive period to continue, while it also appeared willing to ignore part of the consideration for that five-year period.” Whitney said. “I hope they appeal it.”

Unexercised stock options

Plaintiff Alan MacDonald worked for several years at Jenzabar before becoming the company’s chief financial officer. In June 2004, he executed an employment agreement under which the company was to issue him shares of preferred stock as well as options to acquire common stock.

The plaintiff’s stock option rights were specified in two written agreements executed at the same time. Under those agreements, the defendant issued the plaintiff options to purchase a total of 1,516,000 shares of its common stock. The stock options vested in equal allotments over a three-year period. Those agreements further provided that the options to purchase expired after 10 years.

The plaintiff left the company in 2007. At the time of his departure, the plaintiff had not received any preferred shares or exercised any stock options.

The plaintiff returned to Jenzabar in 2008, assuming the position of mergers and acquisitions research developer. The plaintiff left for good six months later without receiving any preferred shares or exercising any stock options.

Under a severance agreement executed in May 2009, the defendant agreed to continue to pay the plaintiff’s salary and a portion of his health insurance for six months.

The severance agreement also included a general release under which the plaintiff agreed to unconditionally discharge the company from “any and all claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses of any nature whatsoever, known or unknown, suspected or unsuspected, arising on or before the date of this Agreement.”

A merger and integration clause provided that the agreement terminated and superseded “all other oral and written agreements or arrangements” between the parties.

whitney-mark

“Basically, any [right] that’s not specifically carved out is going to be extinguished.”

— Mark M. Whitney, on merger clauses in severance agreements

After leaving the defendant in 2009, the plaintiff began discussions with company representatives exploring possible avenues for converting his preferred shares and stock options into cash. On two occasions, the plaintiff attempted to exercise his stock options.

Citing the release in the severance agreement, the defendant rebuffed the plaintiff’s initial attempt to exercise 1,000 options and a subsequent attempt to exercise his remaining 1,515,000 options.

In 2012, the plaintiff sued the defendant in Superior Court for breach of contract. Judge Janet L. Sanders, sitting in the Business Litigation Session, ultimately ruled that the severance agreement unambiguously extinguished the plaintiff’s rights to preferred shares. However, Sanders further ruled the severance agreement was ambiguous regarding the stock options.

After a trial on the limited issue of liability for the stock options, the jury found the defendant liable for refusing to honor the plaintiff’s initial exercise of 1,000 stock options. Jurors found no liability with respect to the plaintiff’s attempt to exercise the remaining options.

Unambiguous agreement

In addressing whether the severance agreement was ambiguous, Meade first addressed the language of the release. The judge found the release “clear and broad,” expressly extinguishing the plaintiff’s employment agreement as well as his rights under any and all agreements predating the severance agreement, including his stock option agreements.

To avoid the conclusion that he had released all rights to preferred shares and stock options, the plaintiff argued that an ambiguity arose by virtue of language in the severance agreement concerning the survival of a confidentiality agreement he had signed when he returned to Jenzabar in 2008.

Specifically, the plaintiff pointed to a sentence explaining his agreement to extend from two to five years noncompete and nonsolicitation periods in the confidentiality agreement. The sentence stated the extended term was “reasonable in light of … the Company’s grant to you of a considerable number of options to purchase common stock.”

But Meade rejected the plaintiff’s contention that that language suggested his rights to the preferred shares and stock options survived the general release. The judge noted that the confidentiality clause in the severance agreement did not mention preferred shares at all.

“By no means, therefore, is there any ambiguity regarding MacDonald’s rights to the preferred shares; those rights were extinguished by the general release,” Meade wrote.

Turning to the issue of stock options, the judge wrote that nothing in the severance agreement’s confidentiality clause indicated the plaintiff would be retaining rights to stock options as consideration for the extension of the noncompete and nonsolicitation periods.

To understand the sentence mentioning the stock options, he wrote, it needed to be read in its entirety.

“The sentence refers not only to MacDonald’s stock options, but also to the ‘senior’ roles and positions he held at Jenzabar, as chief financial officer and mergers and acquisitions researcher,” Meade wrote. “When read as a whole, therefore, the sentence affirms the historical justification for the five-year noncompete and nonsolicitation periods: namely, that MacDonald had held both high-level positions at, and vested stock option rights in, Jenzabar.”

The judge emphasized the policy in Massachusetts is to give effect to general releases, requiring the parties to state any exceptions in clear terms.

“If the language in [the confidentiality clause] was intended to create an exception for MacDonald’s rights to the preferred shares and stock options, it fell well short of achieving the required level of clarity,” the judge observed.

In concluding that the plaintiff’s severance agreement was unambiguous and extinguished rights to both shares and stock options, Meade further noted the contract’s merger and integration clause.

“MacDonald and Jenzabar clearly provided that the severance agreement terminated and superseded all other oral and written agreements or arrangements, but for the confidentiality agreement,” Meade wrote. “In so doing, they showed that, when they intended to, they knew how to properly craft an exception. In so doing, they also revealed, by way of omission, that they did not intend to create an exception for the preferred shares and stock options.”

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