[23 NJSuper Page 435] This action involves the legal validity of so-called restricted stock options granted as incentive to executives of the defendant Standard Oil Company, a New
Jersey corporation, pursuant to a plan recommended by the unanimous vote of the board of directors and adopted by a great majority of the stockholders.
The company's by-laws provide for 15 directors. On March 29, 1951 the board of directors unanimously recommended to the stockholders the adoption of the plan to be hereinafter outlined. The annual meeting of the stockholders was held on June 8, 1951, and prior thereto the text of the plan and the proxy statement was furnished to the stockholders, together with the notice of the meeting. Previously, the text and the proxy statement were submitted to the Securities and Exchange Commission in accordance with the provisions of the Securities Exchange Act and regulations thereunder.
The stockholders adopted the plan by a vote of 47,830,696 shares, which represents over 78% of the total outstanding issue of 60,571,000 shares, but which was actually over 97% of the stock represented at the meeting. Stockholders owning about 13,000,000 shares, or slightly more than 20% of the shares, failed to vote. It is clear, therefore, that even if we make the unwarranted assumption that those who neglected to vote were in opposition to the plan, it would still have had the approval of the great majority of the stockholders.
The plaintiff is the owner of 20 shares of the over 60,000,000 outstanding. Although this is a class suit, he has not been joined by any other stockholder, and no other stockholder gave any testimony in support of his charges.
As is well known, the defendant is one of the largest corporations in the world and the testimony indicated the extent of its interests. The directors testified regarding the training and development of its executives and of the necessity of retaining them. For a period of time prior to the formulation of the plan under consideration, the board explored incentives for the retention of its key employees.
On September 23, 1950 the Congress enacted section 130 A of the Internal Revenue Code, Revenue Act of 1950, Pub. Law No. 814, 81 st Cong. , 2 nd Session. Its chief effect was to relieve the recipient of stock options of the payment of tax at ordinary income tax rates, even though the price at which the option is exercised is lower than the market price of the stock at the time of exercise. It came to the attention of the board of the defendant corporation that a number of competitors had adopted stock option plans conformally to the provisions of the Revenue Code.
To obtain for its own executives the benefits of section 130A of the Revenue Code, the plan under consideration was formulated and subsequently adopted. It provides that options to purchase stock of the company may be granted to any or all of the directors and to such other executives as are designated by the board of directors. All of the directors are full-time officers or employees of the company. The plan is in substance as follows: The board may grant options in its discretion subject to the limitations that no more than 600,000 shares amounting to less than 1% of the company's outstanding stock may be sold pursuant to such options. No more than one-third of such shares may be sold to directors. Options granted in any one year to all directors shall not exceed 60,000 shares. Options granted to any one director shall not exceed 8,000 shares in any one year and not more than 24,000 during the term of the plan. Each option is to be exercisable only after one year of continued employment immediately following the date the option is granted. The option price per share is to be determined by the board of directors, but not less than 95% of fair market value on the date the option is granted. The options may be granted from time to time in the discretion of the board, but (1) all options expire December 31, 1961, unless the board fixes an earlier date; (2) in case of death of an optionee, the option shall be exercisable by his personal representatives, heirs or legatees within a year after date of death, and (3) in other cases of termination of employment, the
option is exercisable only within three months of termination. No option is assignable, except as provided in case of death. All shares purchased by the exercise of options are to be acquired for investment purposes. The board from time to time may amend or revise the terms of the plan for the purpose of meeting any changes in pertinent law or governmental regulations, or for any other purpose which at the time may be permitted by law. But the board may not increase the plan's limitation on the maximum number of shares to be sold pursuant to options, either in the aggregate to all directors, or to any one director, nor may the board decrease the plan's limitations as to the minimum price at which shares may be optioned or extend the term of any option beyond December 31, 1961. The board is to supervise the administration of the plan and its rulings on questions of interpretation are final and binding upon all persons.
Pursuant to the plan, on June 29, 1951 the board of directors granted options to 80 executives for a total of 163,800 shares exercisable at $57.06 per share. For the purpose of satisfying these options the company purchased 129,700 shares of its own stock at an average price of $67.136 per share. Among the optionees for a total of 55,760 shares, or about one-third of the grant, are all the directors who formulated the plan, with the exception of Frank W. Abrams, chairman of the board, who received no options. The defendant indicates that the average attained age of the executives who received options was 51 years and the average length of employment by the defendant or its affiliates was 25 years.
The plaintiff attacks the legality of the plan upon three grounds. First, that it violates R.S. 14:9-1 et seq. Second, that the directors being among the beneficiaries of their proposal, each had a direct, personal and valuable interest in the stock incentive plan; that in their dealings with the stockholders the burden was upon them to prove full and fair disclosure of every material fact which might
possibly lead the stockholders to withhold consent, and that they were guilty of fraudulent conduct because of misleading representations and failure to make full and complete disclosure as to the true purpose of the plan and its effect upon the corporation. Third, that there was no consideration for the grant of the options and they constituted a gift of corporation property.
The validity of the plan as a whole under R.S. 14:9-1 et seq. is challenged by the plaintiff. The first issue is stated in the pretrial order, as follows:
"Is the proposal a plan for the purchase and sale of the stock to employees of the corporation within the meaning of R.S. 14:9-1 et seq ?"
The pertinent portion of the statute, R.S. 14:9-1, reads as follows:
"Any stock corporation * * * may, upon such terms and conditions as may be determined in the manner hereinafter designated, provide and carry out a plan or plans for any or all of the following purposes:
"a. The issue or the purchase and sale of its capital stock to any or all of its employees and those actively engaged in the conduct of it business * * * and the payment for such stock in instalments or at one time, with or without the right to vote thereon pending payment therefor in full, and for aiding any such employees and other persons in paying for such stock by contributions, compensation for services, or otherwise."
R.S. 14:9-2 provides for stockholders' action upon any plan formulated by the directors, at a meeting called for consideration thereof. R.S. 14:9-3 enables a dissenting stockholder holding stock issued before April 15, 1920, to apply for appraisal of his stock. R.S. 14:9-4, as amended by the L. 1948, c. 93, § 1, gives the board of directors the right to amend or revise any plan adopted, except in instances not here pertinent, but "any amendment to or revision of the plan so made by the directors of the corporation may be altered, changed or repealed by the stockholders." The power to amend or revise the terms of the plan conferred
upon the directors by the provision in the plan does not bestow upon the directors any greater right than that granted by the statute.
R.S. 14:9-5 provides that:
"The privileges and powers conferred by this article shall be in addition to and independent of all powers and authority conferred by any other law, and not in restriction or limitation of any of the powers of corporations of this state."
On the narrow question whether the plan as a whole, providing for the grant of options, is a plan for the purchase and sale of stock within the meaning of R.S. 14:9-1(a), I entertain no doubt as to its validity. The issuance by a corporation of an option to purchase stock by an employee or those actively engaged in the conduct of its business, and the exercise thereof by such persons, constitutes "the issue or the purchase and sale" within the construction of R.S. 14:9-1 et seq. Diamond v. Davis , 38 N.Y.S. 2 d 103 (Sup. Ct. 1942), affirmed 265 App. Div. 919, 39 N.Y.S. 2 d 412 (App. Div. 1942), affirmed 292 N.Y. 552, 54 N.E. 2 ...