August 14, 2007
JOHN P. GALLO, PLAINTIFF-APPELLANT,
NOVAVAX, INC., DEFENDANT-RESPONDENT.
On appeal from Superior Court of New Jersey, Law Division, Atlantic County, Docket No. L-3388-03.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued April 24, 2007
Before Judges Skillman, Holston, Jr. and Grall.
IGI, Inc., a publicly traded corporation, employed plaintiff as its president and chief operating officer from 1985 until his termination in 1997. Plaintiff also was a member of IGI's Board of Directors. Defendant Novavax was a wholly-owned subsidiary of IGI. Initially, IGI conducted scientific research on animals and developed animal vaccines. It later began to develop human vaccines.
In 1995, IGI decided to separate the corporate ownership of its human vaccine business from its animal vaccine business by spinning off Novavax as a separate publicly traded corporation, the stock of which was distributed to IGI shareholders in proportion to their ownership of IGI stock. Plaintiff was appointed as president, chief operating officer and a member of the Board of Directors of Novavax, although IGI continued to pay his entire salary, subject to partial reimbursement by Novavax.
During the course of his employment by IGI, plaintiff signed a series of stock option agreements under which he became entitled to purchase IGI stock for a ten-year period at prices specified in the agreements. The agreements provided that in the event of a reorganization of the company, the board of directors could decide to terminate the outstanding options.
At the time of the spin-off of Novavax, IGI's board of directors decided to award its stock option holders options in Novavax in relation to the percentage of value the spin-off removed from IGI. According to the Novavax stock option plan, the spin-off options granted to IGI option holders "may be granted to such holders on substantially similar terms to the corresponding options to purchase IGI common stock held by such holders[.]" As a condition to the grant of an option under the plan, each recipient was required to "execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients."
Around the date of the Novavax spin-off, plaintiff was granted an option to purchase 245,000 shares of Novavax stock. However, plaintiff did not sign a stock option agreement, as required under the Novavax stock option plan. The proposed agreement prepared by Novavax, which plaintiff did not execute, contained a provision which stated in part:
If the Optionee, prior to the Expiration Date, is discharged by the Company or IGI, as the case may be, for "cause" . . . the right to exercise this option shall terminate immediately upon such discharge. "Cause" shall mean willful misconduct by the Optionee or willful failure to perform his or her responsibilities in the best interests of the Company or IGI, as the case may be[.]
The IGI stock option agreements plaintiff signed before the spin-off of Novavax did not contain a similar provision.
On November 21, 1997, IGI terminated plaintiff's employment with IGI and all its subsidiaries. The letter from the chairman of IGI's independent committee of outside directors notifying plaintiff of the termination stated that the committee had determined plaintiff engaged in "wilful misconduct in the performance of [his] duties as President and Chief Operating officer of [IGI]." The dismissal related to the United States Department of Agriculture's investigation of misconduct by IGI in the shipment and sale of a nonconforming poultry vaccine to foreign customers.
Gallo was indicted by a federal grand jury on May 14, 2002, and charged with conspiracy, perjury and obstructing a civil investigative proceeding. The indictment was dismissed without prejudice on January 7, 2003. In addition, a federal civil lawsuit against plaintiff was also dismissed.
Following his termination, Novavax notified plaintiff that "pursuant to Section 3(f) of each Non-Statutory Stock Option Agreement governing the Spinoff Options[,]" his 245,000 spin-off options to purchase Novavax stock had been terminated based on his discharge for cause.
Plaintiff filed this action in the Law Division, asserting claims against Novavax for breach of contract, negligent misrepresentation, intentional misrepresentation, negligence, fraud, civil conspiracy and unjust enrichment, based upon Novavax's termination of his 245,000 IGI spin-off stock options. Plaintiff did not join IGI as a defendant. Novavax filed a third-party complaint against IGI for indemnification, but later dismissed this complaint. By an amended complaint, plaintiff also asserted a claim against Novavax for conversion of a stock certificate representing 63,190 shares of Novavax stock purchased in 1996, which resulted in an escheat of the stock to the State. By a second amended complaint, plaintiff asserted a negligence claim against Novavax regarding the escheat of this stock.
Novavax filed a motion for summary judgment dismissing plaintiff's conversion and negligence claims based on the escheat of the 63,190 shares of Novavax stock. The trial court granted this motion by a written opinion.
The trial court denied cross-motions for summary judgment regarding plaintiff's claims against Novavax based upon Novavax's termination of his spin-off stock options, and those claims were tried before a jury. At the close of plaintiff's case, plaintiff withdrew his claims of intentional misrepresentation and civil conspiracy, and the trial court granted Novavax's motion for a directed verdict dismissing plaintiff's remaining claims. The court stated the reasons for the dismissal orally and expanded upon those reasons by a subsequent memorandum of decision dated May 1, 2006.
Plaintiff appeals both from the summary judgment dismissing his claims based on the escheat of the 63,190 shares of NovavaX stock to the State and the directed verdict dismissing his claims based on the termination of his 245,000 Novavax stock options granted as a result of the IGI-Novavax spin-off. Plaintiff presents the following arguments:
I. THE TRIAL JUDGE PREMATURELY AND MISTAKENLY UNDERTOOK TO WEIGH THE EVIDENCE; FAILED TO FOLLOW NEW JERSEY'S WELL-SETTLED JURISPRUDENCE IN CONSIDERING R. 4:37-2(b) MOTIONS; AND INCORRECTLY ENTERED INVOLUNTARY DISMISSAL AGAINST GALLO.
II. THE TRIAL JUDGE IMPROPERLY DISMISSED GALLO'S BREACH OF CONTRACT CLAIM.
III. THE TRIAL JUDGE IMPROPERLY DISMISSED GALLO'S UNJUST ENRICHMENT CLAIM.
IV. THE TRIAL JUDGE IMPROPERLY DISMISSED GALLO'S NEGLIGENT MISREPRESENTATION CLAIM.
V. THE TRIAL JUDGE IMPROPERLY DISMISSED GALLO'S NEGLIGENCE CLAIM.
VI. THE TRIAL JUDGE IMPROPERLY DISMISSED GALLO'S FRAUD CLAIM.
VII. THE MOTION JUDGE IMPROPERLY GRANTED SUMMARY JUDGMENT AS TO THE EIGHTH COUNT OF GALLO'S FIRST AMENDED COMPLAINT.
A. PROCEDURAL HISTORY RELEVANT TO EIGHTH COUNT OF GALLO'S FIRST AMENDED COMPLAINT.
B. STATEMENT OF FACTS RELEVANT TO EIGHTH COUNT OF GALLO'S FIRST AMENDED COMPLAINT.
C. GENUINE ISSUES OF MATERIAL FACT EXISTED PREVENTING THE MOTION JUDGE FROM GRANTING SUMMARY JUDGMENT ON THE EIGHTH COUNT OF GALLO'S FIRST AMENDED COMPLAINT.
We reject the arguments presented under Point VII of plaintiff's brief relating to the escheat of the 63,190 shares of his Novavax stock substantially for the reasons set forth in Judge Nugent's comprehensive and well-reasoned written opinion. We also note that the State liquidated the escheated Novavax stock for more than $300,000 and that plaintiff may submit a claim to the State Treasurer to recover the proceeds from that sale. N.J.S.A. 46:30B-72.
We reject the arguments set forth in Point I through VI of plaintiff's brief substantially for the reasons set forth in the trial court's memorandum of decision discussing its reasons for the grant of a directed verdict. However, some supplemental comments are warranted regarding Point II of plaintiff's brief.
Initially, we note that although this case was tried over the course of four days, its disposition turns primarily on the language of the IGI stock option agreements from which the disputed Novavax stock options were derived, the Novavax stock option plan and the stock option agreement plaintiff was required to sign in order to participate in the Novavax stock option plan.
The IGI stock option agreements granted IGI the right to terminate the agreements upon a reorganization of IGI. Those agreements provided:*fn1
Prior to dissolution, liquidation, merger, consolidation, or reorganization of the Company (the "Event"), the Board may decide to terminate each outstanding option. If the Board so decides, each option shall terminate as of the effective date of the Event, but the Board shall suspend the exercise of all outstanding options a reasonable time prior to the Event, giving each Optionee not less than fourteen days written notice of the date of suspension, prior to which an Optionee may purchase in whole or in part the Optioned Shares available to him as of the date of receipt of the notice.
Thus, plaintiff was put on notice when he received the IGI stock options that they could be terminated upon a reorganization of the company. We believe that this provision of the option agreements also can be read to allow IGI to modify the option agreements upon the occurrence of a reorganization.
It is undisputed that IGI's spin-off of its Novavax subsidiary constituted a corporate reorganization. Consequently, this spin-off triggered IGI's right to terminate or modify plaintiff's IGI stock options.
However, IGI's Board of Directors, which included plaintiff, elected not to terminate those options but instead to maintain them without modification*fn2 and in addition, in recognition of the fact that the spin-off would reduce the value of the IGI shares, to offer the option holders the same number of stock options in Novavax. The primary document describing this offer was the 1995 Novavax stock option plan.*fn3
Plaintiff relies upon section 3(c) of the plan, which states in pertinent part:
The Spinoff Options may be granted to such holders on substantially similar terms to the corresponding options to purchase IGI Common Stock held by such holders, including the rate at which the options vest and the expiration date of such options.
Plaintiff argues that the provision in the Novavax spin-off option agreements for termination of the option upon discharge for cause is inconsistent with section 3(c) because the IGI stock option agreements did not contain such a forfeiture provision. However, section 3(c) does not state that the terms of the Novavax spin-off option must be identical to the IGI options. It only states that such options "may be granted . . . on substantially similar terms to the corresponding [IGI] options[.]" The word "may" is ordinarily understood to be permissive rather than mandatory. See Brenner v. Berkowitz, 134 N.J. 488, 510 (1993). Moreover, the term "substantially similar" does not mean "identical." Therefore, we do not believe that section 3(c) can be reasonably construed to prohibit a provision in the Novavax stock option agreements for forfeiture upon a discharge for cause simply because the IGI option agreements do not contain such a provision.
This conclusion is supported by other sections of the Novavax stock option plan, which state that the Board has broad discretion in prescribing the terms of any stock option agreements issued thereunder, that any prospective optionee must execute an agreement consistent with the plan approved by the Board of Directors as a condition of the grant of an option, and that such agreements may differ among recipients. Section 2(b)(i) of the plan states in pertinent part:
The Board shall have authority, subject to the express provisions of the Plan, . . . to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations which are, in the judgment of the Board of Directors, necessary or desirable for the administration of the Plan.
In addition, section 5 states:
As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients.
Moreover, section 10 states "the Board of Directors shall determine the period of time during which an optionee may exercise an option following . . . the termination of the optionee's employment" and that "[s]uch periods shall be set forth in the agreement evidencing such option[,]" thus indicating that the effect of a termination of employment upon a Novavax stock option was a subject that would be addressed in each individual recipient's option agreements.
In short, considered in its entirety, the Novavax stock option plan does not support plaintiff's contention that Novavax was prohibited from providing for the forfeiture of plaintiff's spin-off stock options upon a discharge for cause. Instead, the plan confers broad discretion upon the Board of Directors to prescribe the terms of all stock options, including provisions for termination of the rights thereunder upon a discharge from employment.
Moreover, the plan unequivocally states that an employee's execution of a stock option agreement approved by the Board is "a condition to the grant of an option under the Plan." It is undisputed that plaintiff never executed a stock option agreement for the spin-off Novavax stock options. This failure by itself would justify the denial of plaintiff's claim under the Novavax stock option plan.
Furthermore, even if this failure is disregarded, we are satisfied the provision in those agreements for forfeiture of the spin-off Novavax stock options upon discharge for cause was consistent with the plan and therefore valid. Accordingly, we affirm the trial court's dismissal of plaintiff's breach of contract claim.
Plaintiff's other arguments do not warrant any discussion in addition to the reasons set forth in the trial court's memorandum of decision. R. 2:11-3(e)(1)(E).