The Commercial Division in Monroe County, New York recently decided an interesting case, Kellman v. Document Security Systems, Inc. (Rosenbaum, J.), that dealt with a topic familiar to many employers: vesting of stock options to a terminated employee under an employment agreement.

Defendant Document Security Systems, Inc. (“DSS”) develops, licenses, manufactures and sells anti-counterfeiting technology and products. Co-Defendant Secuprint, Inc. (“Secuprint”) is a subsidiary of DSS which was created to acquire assets of another company, DPI of Rochester LLC (“DPI”), a printing company owned by Plaintiff, Matthew Kellman, and another individual.  When DPI’s assets were acquired, Kellman was hired by DSS as Vice President of Sales.  In that role, Kellman received a salary as well as a grant of stock options for 50,000 restricted shares in DSS pursuant to an employment agreement (the “Employment Agreement”).  Pursuant to the Employment Agreement, the restricted shares “shall vest” in equal yearly installments over a five-year period as long as Kellman was still an employee of DSS on each anniversary date.

Kellman’s first 10,000 shares vested after his first anniversary.  Kellman was subsequently terminated over performance issues before reaching the second vesting date.  DSS, however, elected not to deem his termination “for cause” so as to allow him to collect severance payments.  Interestingly, another provision of the Employment Agreement stated that, if Kellman was terminated “without good cause,” he would be entitled to, among other things, the immediate vesting of any unvested capital stock granted to him pursuant to an Incentive Plan (an agreement separate and apart from the Employment Agreement), “or otherwise.” DSS elected not to provide Kellman with the remaining 40,000 shares of restricted stock, claiming that the options had not vested pursuant to the Employment Agreement.  Kellman then commenced this lawsuit alleging that Defendants breached the Employment Agreement and seeking damages equal to the value of the 40,000 shares.  Kellman ultimately moved for summary judgment on his claims, and Defendants also cross-moved for summary judgment.

The Court, in deciding the summary judgment motions, noted that Defendants’ CFO mistakenly removed the restrictions at one point from the restricted shares to Kellman and even sought to have a new stock certificate issued to him for those remaining shares.  However, upon realizing his mistake of removing the restrictions even though the restricted shares had not vested pursuant to the Employment Agreement, he later canceled the new certificate and had the shares canceled as well.  Despite the CFO’s error, the Court interpreted the Employment Agreement to have clear and unambiguous terms with respect to the vesting schedule of the 50,000 shares, and the CFO’s error did not waive the terms of the Employment Agreement.

Furthermore, despite Kellman’s contention that the phrase “or otherwise” in the Employment Agreement encompassed the restricted stock and, as such, immediately vested upon termination, the Court disagreed.  The Court noted that this provision did not apply to the restricted stock, which was subject to the clear and definite vesting schedule set forth elsewhere in the Employment Agreement.  To hold otherwise would render the vesting schedule meaningless, according to the Court.  Based upon the Court’s interpretation of the Employment Agreement, summary judgment was granted in favor of the Defendants and Kellman’s Complaint was dismissed.

This case provides an excellent example of the importance of having a clearly drafted employment agreement that defines the parties’ rights and obligations.  Had this employment agreement been drafted with less clearly defined terms, the Court could have ruled against the employer and determined that Kellman was entitled to an additional 40,000 shares of stock in the company.  It cannot be stressed enough how vital it is to consult with counsel to either draft or assist with preparing agreements such as employment agreements to avoid possible pitfalls.