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A lawsuit by a former Fidelity Investments CFO raises the question of what happens to unvested stock options in a layoff.
Alix Stuart, CFO.com | US
July 1, 2010
What would prompt a longtime, well-respected CFO to sue his former employer after being let go?
In Mark Sullivan's case, it's unvested stock options.
In a complaint filed in June in a Massachusetts court, the former EVP and division CFO for privately held Fidelity Investments contends that the mutual-fund giant should be compensating him for 975 options that vested a year after he was let go, and for another 2,900 that will vest between the end of this year and 2012. The complaint doesn't specify what the options are worth, and Sullivan is seeking "damages, to be determined at trial," according to the document.
Sullivan's attorney did not respond to questions seeking an estimated value for the options or the amount of any potential award. Sullivan, now CFO at Boston-area software maker Aspen Technology, also declined to comment through his attorney.
In general, employees who leave a company voluntarily or for performance-related reasons have no hope of recovering the value of unvested options. "If the objective is retention, allowing access to them after they leave defeats the purpose," says Doug Friske, head of Towers Watson's global executive compensation consulting practice.
However, there are few standard practices regarding the fate of unvested options when an executive is laid off or otherwise let go for reasons not considered "for cause," experts say.
Normally, the legal documents governing the options would not provide for continued vesting or a cash-out of the unvested options, says Andrew Graw, partner and head of employee benefits and executive compensation for law firm Lowenstein Sandler, and an employee would typically have another 90 days or so to exercise any options that had already vested.
But employers have some discretion in the matter, so some may use the unvested options as part of a general severance package, sometimes accelerating vesting schedules or allowing for continued vesting during a specified period, says Graw. They may also extend the length of time during which a former employee can exercise vested options.
Employee lawsuits aimed at recovering the value of unvested options generally have little chance of succeeding, regardless of the departure circumstances, since the employer is under no obligation to offer it. Sullivan may have a stronger case than most, though, since his lawsuit claims that the stock-option plan documents in question "do not contain any term that requires a participant to be a Fidelity employee at the time of vesting in order for his or her shares to vest," according to the complaint.
Fidelity, for its part, says its "incentive share programs have many aspects to them that weren't addressed accurately in the lawsuit," according to company spokesman Michael Shamrell. He declined to comment further, but said the company believes "the claims in this lawsuit have no merit and we intend to defend against it vigorously."
Sullivan, who started with the firm in 1994 as director of corporate reporting, climbed up the corporate ladder to become CFO of the company's employer services division in 2001. According to the complaint, he was later named EVP, becoming one of only three people to hold that title in the finance organization. Between 2006 and the end of 2008, when his employment was terminated, Sullivan was leading a cost and profitability initiative, reporting to Fidelity's corporate CFO.
Fidelity redeemed the 2,000 shares that had vested when Sullivan left at the end of 2008. The complaint doesn't specify why he was let go or challenge that decision in any way.