The US Court of Appeals for the Eighth Circuit held in Schaffart v. ONEOK, Inc. that former executives were entitled to payment under equity award agreements in part because the individual who determined that the awards were forfeited on each executive's employment termination did not have authority to administer the plan.
The US Court of Appeals for the Eighth Circuit held on July 5, 2012 that former executives were entitled to payments under performance share and restricted stock award agreements, despite their employer's determination that the executives forfeited their awards on their employment termination. The court's holding was based in part on its conclusion that the individual making that determination did not have authority to administer the plans. The decision in Schaffart v. ONEOK, Inc. highlights the importance of carefully drafting plan terms and ensuring that the persons making plan decisions have proper authority to administer the plan.Close speedread
The US Court of Appeals for the Eighth Circuit issued an opinion on July 5, 2012 in Schaffart v. ONEOK, Inc. Key litigated issues were whether the plaintiffs, former executives at ONEOK, Inc., were entitled to receive:
Pro-rated payments under their performance share and restricted stock awards.
Attorneys' fees under Nebraska law because their awards constituted wages.
The plaintiffs, executives in ONEOK's Omaha, Nebraska office, entered into written performance share and restricted stock agreements (agreements) under the ONEOK Long-term Incentive Plan and the ONEOK Equity Compensation Plan (plans). The agreements required the plaintiffs to continue their employment with ONEOK for a three-year performance period to receive the full awards. However, the plaintiffs could receive a pro-rated portion of the awards if they retired or were involuntarily terminated without cause before the end of the three-year period. The agreements did not define retirement or involuntary termination. In addition, the plans and agreements gave ONEOK's Executive Compensation Committee (ECC) authority to administer the plans and stated that the ECC's determinations were final, binding and conclusive.
Before the end of the three-year period, ONEOK sold some of its assets to TransCanada and closed its Omaha office. Although TransCanada offered some employees employment in Omaha, it required the plaintiffs to relocate to Tulsa, Oklahoma, to continue their employment. After the plaintiffs declined, David Roth, a senior executive at ONEOK who was not a member of the ECC, determined that the plaintiffs were not eligible to receive pro-rated portions of their awards. Roth concluded that the plaintiffs voluntarily left ONEOK because they declined transfers and that they were not eligible for retirement. The ECC did not review the plaintiffs' claims.
The plaintiffs sued ONEOK for breach of contract, and the district court found in their favor, awarding money damages to each of them equal to a pro-rated portion of their awards. The court denied the plaintiffs attorneys' fees because it determined that the awards were not wages. ONEOK appealed the district court's judgment, and the plaintiffs cross-appealed the court's denial of attorneys' fees.
The Eighth Circuit held:
Roth's determination that the plaintiffs were not entitled to a pro-rated portion of the awards was not due any deference because Roth did not have authority to administer the plans.
The plaintiffs were entitled to pro-rated portions of the awards because they had effectively retired from the company.
Contrary to the district court's holding, the plaintiffs were also entitled to attorneys' fees, because their awards constituted compensation under Nebraska law, which requires payment of attorneys' fees on claims of unpaid wages.
Under applicable state law, if plan terms provide a committee with final, binding and conclusive authority to determine a participant's rights to benefits and the committee's decision is made in accordance with the plan provisions, then the committee's decision is given deference absent a showing of fraud of bad faith.
However, here under the terms of the plans, the ECC, not Roth, had sole authority to administer the plans, and the ECC did not determine or review the plaintiffs' claims. In addition, the court found Roth had no express, implied or apparent authority to act on the ECC's behalf. The court held that Roth's decision was not consistent with the plan's terms and therefore was not entitled to deference.
The Eighth Circuit also found the district court properly concluded the plaintiffs had retired under the plans. Because the plans and agreements did not define retirement, the court construed the word retirement against ONEOK as the drafter and found the plaintiffs had retired by ceasing their work for ONEOK. Although the plaintiffs were 47 and 49 years old, respectively, when they left ONEOK, the court noted that:
ONEOK's retirement plan demonstrated retirement could occur at different ages.
ONEOK paid some employees who were hired by TransCanada pro-rated benefits under the same plans, even though the employees had not reached age 50 (the earliest retirement age under ONEOK's retirement plan).
Finally, the court found that under the Nebraska Wage Payment and Collection Act:
Plaintiffs who succeed on claims for unpaid wages are entitled to recover attorneys' fees of at least 25% of the unpaid wages.
Because the stated purpose of the plans in this case was to provide incentives to attract new employees, retain current employees and reward performance, the pro-rated distributions were wages and the plaintiffs were entitled to attorneys' fees.
The Eighth Circuit's decision highlights the importance of drafting an equity incentive plan clearly and defining any terms that impact if and how payments are made under the plan. Employers should ensure the persons making decisions under their plan's terms have actual authority to make plan determinations and that determinations are made consistent with the procedures in the plan. Employers should also be aware that attorneys' fees may be available to plaintiffs in cases challenging determinations made under equity incentive plans.