First Court of Appeals Construes an Executive Employment Agreement and Restricted Stock/Stock Option Agreements in Favor of the Employee

Today, the First Court of Appeals issued its decision in Hercules Offshore, Inc. v. Guthrie, No. 01-10-00968-CV (Tex. App. -- Houston Feb. 28. 2013).  Ms. Guthrie entered into an Executive Employment Agreement.  The Agreement provided that, if Ms. Guthrie was terminated other than for cause with 24 months after a change of control for the company, then all of her stock options and grants of restricted stock would vest and become immediately exercisable and unrestricted as of the date of her termination.  There was a change of control several months later.  Both the original company and its successor awarded restricted stock and stock options to Ms. Guthrie.  Some of the agreements relating to the stock options and restricted stock provided that, if Ms. Guthrie was terminated, her rights would be forfeited.

Within 24 months after the change of control, the successor company terminated Ms. Guthrie for reasons other than cause.  Ms. Guthrie took the position that all of her rights had vested.  The company took the position that some of the rights had been forfeited.

The First Court of Appeals ruled in favor of Ms. Guthrie.  The court rejected the argument that the Executive Employment Agreement was in conflict with the stock option/restricted stock agreements and instead harmonized those agreements.  The court concluded that the various agreements should be read together, so that Ms. Guthrie's stock options vested on the date of her termination, prior to any forfeiture:

Hercules’s argument is premised on the existence of a conflict between the two provisions and that the 2007 and 2008 stock agreements were signed after the executive agreement. There is, however, no conflict. Paragraph 6(ii) of the executive agreement is a specific provision that is only effective if “Termination occurs within 24 months following a Change of Control.” Hercules acknowledges that Guthrie was terminated within 24 months after a change of control, the merger of Hercules and TODCO. Hercules also acknowledges that specific contractual provisions control over general provisions. Had Guthrie been terminated in the absence of a change of control or more than 24 months after the merger, paragraph 3(a) of the 2007 and 2008 stock agreements would apply. In addition, paragraph 7 of the executive agreement acknowledges the possibility of “future participation in any plan, program, policy or practice provided by the Company.”

The court noted that the company could have prevented the result if it had chosen to do so:

Hercules could have, but did not, include a provision in the 2007 and 2008 stock agreements that the forfeiture of unvested stock on termination controls over any other agreement between the parties.

The latter point bears emphasis.  Either party could have avoided this lawsuit by clarifying the terms of the contracts.  Instead, the parties let hundreds of thousands of dollars depend on the judicial construction of the agreements.  For the employer, this was an expensive oversight.

David C. Holmes is a Houston employment lawyer with The Law Offices of David C. Holmes

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