Pettiona v Advent Software Inc
[2003] VSC 243
•4 July 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2084 of 2001
| DARREN JOSEPH PETTIONA | Plaintiff |
| v | |
| ADVENT SOFTWARE INC | Defendant |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 17-19 June 2003 | |
DATE OF JUDGMENT: | 4 July 2003 | |
CASE MAY BE CITED AS: | Pettiona v Advent Software Inc | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 243 | |
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Contract – option agreement – construction – whether vested interest – damages.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P.J. Riordan | Riordan & Partners |
| For the Defendant | Mr N.J.D. Green QC and Mr Mark Champion | Kelly & Chapman |
HIS HONOUR:
In 1996 the plaintiff, Darren Joseph Pettiona, set up a business distributing in Australia licences to use investment software packages developed by the defendant, Advent Software Inc ("Advent"). Advent is a company registered under the law of Delaware in the United States of America. The vehicle for Mr Pettiona's business was a local company, Portfolio Management Systems Pty Ltd ("PMS"). In mid 1998 Mr Pettiona held 54% of the shares in PMS, the balance being held by investors.
In May 1998 Mr Pettiona attended an Advent users spring conference in San Francisco. At that time PMS was indebted to Advent in the sum of approximately $700,000 and was suffering from a lack of working capital. In the course of this conference Mr Pettiona spoke with Irving Henry Lichtenwald, the then Executive Vice President, Chief Financial Officer and Secretary of Advent. The outcome of this meeting was a proposal on behalf of Advent that it purchase all of the shares of PMS and assume direct control of the distribution of Advent products in Australia. Mr Pettiona, as a step in the implementation of this proposal, subsequently acquired all of the shares in PMS. The Advent proposal finally took the form of two related agreements entered into on 29 November 1998 between Mr Pettiona and Advent. These were a share purchase agreement and a three year employment and non-competition agreement (“employment agreement”).
This litigation concerns the meaning and effect of cl. 4(c) of the employment agreement whereby Advent agreed to grant to Mr Pettiona "24,000 options to purchase [Advent's] common stock under the terms of [Advent's] 1992 stock plan”.
There were in evidence two Advent stock options plans: a 1992 stock plan amended as at 30 April 1998 and a 1998 non-statutory stock option plan. I shall refer to these plans respectively as the 1992 Plan and the 1998 Plan.
On 23 November 1998 Advent duly granted to Mr Pettiona 24,000 stock options. Some months after he commenced employment with Advent, Mr Pettiona signed a document called a “stock option agreement”. This option agreement sets out details of the options granted, their exercise price and what is described as a "vesting schedule". Advent contends that under the stock option plan and the vesting schedule the stock options vested only progressively: 20 percent at the expiration of 12 months after the grant and thereafter as to one sixtieth on the last day of each month. Consequent upon the termination of his employment on 28 November 2001, Mr Pettiona was therefore entitled to exercise only those options which had previously vested.[1]
[1]Defence para.7
The situation is a little more complicated since Advent resolved on two occasions during Mr Pettiona's employment to split its stock. As at 30 July 1999 the split was a three for two stock split[2] and as at 28 February 2000 the further split was a two for one stock split.[3] For my purposes, nothing turns on this other than the number of stock options in question and a consequent change in the exercise price. Accordingly, the 24,000 stock options became 36,000 stock options by the first anniversary of Mr Pettiona's employment and, a few months thereafter, they became 72,000 stock options. I shall, for convenience, adopt their post-split numbers. This means that, according to Advent, Mr Pettiona's entitlement was as follows: 14,400 stock options on 23 November 1999 and thereafter a further entitlement of 1,200 stock options each month over the following four years. Under the employment agreement, the terms of his employment expired after three years. On that date his entitlement was to 43,200 stock options, leaving 28,800 of the stock options unavailable to him. Mr Pettiona in this litigation asserts an entitlement under cl. 4(c) of the employment agreement to this unused parcel of 28,800 stock options and seeks damages for Advent's breach of cl. 4(c) in not providing them.
[2]Defence para.5
[3]Defence para.6
In the event that he be unsuccessful on this point of construction, Mr Pettiona seeks to rectify cl. 4(c) so that it reflects the bargain which he says he made. He seeks similar relief for misleading and deceptive conduct and also seeks to raise against Advent an estoppel against its denial of his asserted entitlement.
The Construction Point
Clause 4 of the employment agreement conferred a number of benefits upon Mr Pettiona. First, he was to receive a base salary of $A280,000 per annum. Second, he was eligible to participate in a bonus structure on terms to be determined. Third, he was to receive certain fringe benefits. Finally, in cl. 4(c) it is provided:
"In connection with the Commencement Date, Employee will receive a grant of 24,000 options to purchase Buyer's Common Stock under the standard terms of Buyer’s 1992 Stock Plan."
In this agreement Mr Pettiona is the Employee and Advent the Buyer. Advent is so described because this agreement was executed as one of two agreements, in the other of which Advent is in truth the buyer of the shares in PMS. The Commencement Date is 29 November 1998.
I should mention, too, that the employment agreement contains an entire agreement provision[4], a provision apparently intended to exclude the contra proferentem rule[5], a provision that headings do not form part of the agreement[6] and a provision to the effect that the agreement is to be construed in accordance with the domestic laws of the State of Victoria.[7] It also provides that the drafting and negotiating history of the agreement may not be used as an aid to construction.[8]
[4]Cl. 11(d)
[5]Cl. 11(g)
[6]Cl. 11(l)
[7]Cl. 11(e)
[8]Cl. 11(g)
It was put on Mr Pettiona's behalf that the words of cl. 4(c) up to, but not including, the last phrase "under the standard terms of Buyer's 1992 Stock Plan", should be construed as conferring on him an immediate right to all of the 24,000 stock options. The question then is as to the effect upon this right of the provisions in the stock plan.
My first task is to identify which of the stock plans I am to construe. Clause 4(c) of the employment agreement refers to the 1992 Plan. Advent appears to have treated this to refer to the 1998 Plan both in its dealings with Mr Pettiona and in its pleadings. Counsel for Advent told me that their client treated both as contractual documents. The difficulty which I must face, if the reference in cl. 4(c) is to the 1992 Plan, is that Advent did not grant any stock options under that plan. Counsel for both parties, however, were content to address the entitlements of Mr Pettiona as under the 1998 Plan. It seems to me that I should do likewise.
The 1998 Plan is administered by an Administrator which is relevantly defined as the board of directors of Advent.[9] The plan deals with stock options, which may be incentive stock options and non-statutory stock options; it also deals with stock purchase rights. The rights with which I am concerned are non-statutory stock options. The Administrator is empowered to determine to grant options[10] and the terms and conditions of their exercise[11]. At its meeting of 23 November 1998 the Board passed the following resolution:
"RESOLVED: … that the persons listed on Schedule A attached hereto shall be granted, effective as of their date of employment on closing, nonstatutory stock options under the 1998 Nonstatutory Stock Option Plan for the number of shares of Common Stock set forth opposite their respective names, that such options shall be granted and exercisable at the fair market value on the grant date of the options and shall be exercisable over a period of five years from the date of grant at the rate of 20% of the shares one year after the date of grant and 1/60th of the total option grant per month for the next 48 months and shall otherwise be in the form of the nonstatutory stock option agreements authorized under such plan; and the proper officers of this corporation are hereby authorized to take all such action and execute all such documents as may be necessary or proper in order to issue such options in accordance with the plan and to comply with all applicable laws and regulations."
In Schedule A Mr Pettiona's name appears beside the figure 24,000 with an exercise price of $37.25. It will be noted that the resolution is in terms of an immediate grant of options "effective as of the date of employment". Mr Pettiona's date of employment is 29 November 1998.
[9]Cl. 2(c)
[10]Cl. 13
[11]Cl. 10(a)
The resolution of the Board, having set out the terms of the progressive exercise, then goes on to provide with respect to the options granted that they "shall otherwise be in the form of the non-statutory stock option agreements authorised under such plan". I emphasise the word "otherwise", which makes it plain that the specified terms of the grant are not to be modified by the terms of an option agreement to be entered into.
It will be recalled that some months later Mr Pettiona executed an option agreement. This document, too, is expressed to have been made under the 1998 Plan. In cl. 2(q) of the 1998 Plan a definition of option agreement is provided:
“’Option Agreement’ means an agreement between the Company [Advent] and an Optionee evidencing the terms and conditions of an individual Option Grant. The Option Agreement is subject to the terms and conditions of the Plan.”
Another relevant definition in cl. 2 is:
“(n)‘Notice of Grant’ means a written or electronic notice evidencing certain terms and conditions of an individual Option Grant. The Notice of Grant is part of the Option Agreement.”
It is in this executed option agreement that is found the vesting schedule upon which Advent relies:
"Vesting Schedule:
Subject to the Optionee continuing to be a Service Provider on such dates, this Option shall vest and become exercisable in accordance with the following schedule:
20% of the Shares subject to the Option shall vest twelve months after the Vesting Commencement Date, and 1/60th of the Shares subject to the Option shall vest upon the last day of each month thereafter."
The vesting commencement date is 23 November 1998. It will be observed that this schedule has the shares vesting progressively, not the options themselves.
The option agreement contains the following clauses:
"25.Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant attached as Part 1 of this Agreement (the 'Optionee') an option (the 'Option') to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the 'Exercise Price'), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(b) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail.
26. Exercise Option:
(a)Right to Exercise. This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this Option Agreement.
…"
There is in fact no Part 1 to the 1998 stock option agreement. There is, however, a Notice of Grant which is headed as Part IV. I take it that this is the notice referred to in cl. 25. The matter is a little more complicated by the way the 1998 Plan and the option agreement appear in the Court Book. The 1998 Plan appearing at pages 675-683 contains cll. 1-17, which is found at pages 648-689. There is no cl. 18. The option agreement contains on pages 688-9 an exercise notice and cll. 19-24. Clauses 25-33 appear at pages 685-687. Then there is within the option agreement the notice of stock option grant, at page 684.
I am in this case concerned with Mr Pettiona's right to exercise options after the date of termination of his employment. Clause 10(b) of the 1998 Plan refers to the exercise of options upon termination as follows:
"(b)Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, other than upon the Optionee's death or Disability, the Optionee may exercise his or her Option, but only within such period of time as is specified in the Option Agreement, and only to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan."
It will be observed that in this clause a distinction is drawn between the vesting of options and the right of the optionee to exercise them. It is this distinction which provided the basis for the submission put on behalf of Mr Pettiona that, in this case, he received under cl. 4(c) and under the board’s resolution of 23 November 1998 a vested option with deferred rights of exercise; not, as Advent contends, an unvested option which would vest progressively and with deferred rights of exercise.
It cannot be doubted that the 1998 Plan draws this distinction generally. For the most part, however, the plan is concerned only with rights of exercise rather than with vesting rights.[12] Mention is made of vesting in provisions dealing with death[13] or disability[14] or termination of employment of the optionee[15]. In cl. 12(c), which deals with the impact upon the options of a merger of Advent with another corporation, provision is made in certain circumstances for the optionee to vest in and to have the right to exercise the options forthwith. The terminology I have adopted in the previous sentence is intentional. The use of the word “vest” in the plan is sometimes a little unusual for an Australian lawyer. In this cl. 12(c) to which I have referred, the plan provides that “the Optionee shall fully vest in ….. the Option”. In cl. 10(b), (c) and (d) the provision is “if …. the Optionee is not vested as to his or her entire option”. Elsewhere, the plan speaks in more familiar terms of the option vesting.
[12]See for example cll. 9(b) and 10(a)
[13]Cl. 10(d)
[14]Cl. 10(c)
[15]Cl. 10(b)
Acknowledging the distinction, it appears that the plan contemplates that the option granted might be vested or unvested and that, notwithstanding it be a vested option, the right to exercise it might be qualified or deferred. Any condition as to the optionee’s title to the option or to its exercise[16] must be found in the terms of the grant, or at least determined at that time. These terms are to be evidenced in the option agreement.[17] The option agreement must also set out the terms and times for the exercise of the option.[18] Any provision as to vesting must also be dealt with at the time of grant, for the Administrator is given no power subsequently to convert an option into an unvested option or vice versa; its only power with respect to vesting is to accelerate the time for this.[19] Since the resolution of grant in the present case imposed no restriction on or precondition to the vesting of the options, it must be taken that the options issued were in fact vested options albeit with a qualified and deferred right of exercise.
[16]See cl. 9(b)
[17]Cl. 2(q)
[18]Cl. 10(a)
[19]Cl. 4(b)(vi)
It follows from this, as may be expected, that Advent’s grant conformed to its obligation under cl. 4(c) of the employment agreement. Indeed, as counsel for Mr Pettiona pointed out, any other result would be most surprising. The terms of the grant include a provision for progressive exercise from the end of the first year of employment over the succeeding four years. Mr Pettiona’s employment was for three years only. It can hardly be supposed that the grantor had in mind that the plan would operate to derogate from that grant, so that this right in the fourth and fifth year was an illusory one, or even that Advent might determine the employment on 90 days' notice within the first year so that the options granted would not have any value at all.
I conclude, therefore, that upon a proper construction of the grant and of the 1998 Plan, Mr Pettiona received on 23 November 1998 24,000 options, that is 72,000 post-split options. These options were not subject to any vesting qualification but there were deferred and qualified rights of exercise. This means that cl. 10(b) operated by conferring on him the right to exercise all of the remaining 28,800 options following termination of his employment. This right of exercise is qualified by the plan[20] and by the option agreement as to its manner of exercise and as to its time of exercise: it must be exercised within three months after termination of the employment.
[20]See cl. 10(a)
This position is not affected by the terms of the option agreement. This is because this document cannot create new vesting conditions after the grant, for the option agreement is to evidence, not to modify, the terms of the grant.[21] Nor is it significant that Mr Pettiona executed the option agreement because he, too, then had no power to vary the terms of the grant. Furthermore, the option agreement provides that, in the event of conflict between it and the 1998 Plan, the plan shall prevail.[22]
[21]Cl. 2(q)
[22]Cl. 25
The option agreement, like the plan, appears to be a standard form document, parts of which have no application to the Pettiona options. Clause 32, for example, appears to contemplate the case where a person earns the progressive vesting of shares by continuing as an employee in circumstances very different from the present. So too, cl. 31 provides that the option agreement is governed by the internal substantive laws of the State of California, rather than those of the State of Victoria, as was agreed. The introductory words of the vesting schedule speak of “vesting” and becoming “exercisable” as if they referred to the same matter. The schedule itself, like cl. 32, speaks of the shares vesting. If the option agreement in this particular case is to meet the description in its definition in the 1998 Plan, the drafter of the schedule must be taken to have used “vest” and “exercisable” interchangeably. That this is the case is suggested by the terms of cl. 26(a) where the vesting schedule is said to set out the time for exercise of the options. The alternative view is that the word “vest” in the schedule has been permitted to remain although it is not appropriate for Mr Pettiona’s grant. In either case, the notice of grant can be reconciled with the terms of the grant by the board on 23 November 1998.
I conclude, therefore, notwithstanding the use of the word “vest” in the vesting schedule, that the option agreement and the 1998 Plan are to be construed that the grant of the options to Mr Pettiona on 23 November was an immediate grant of vested options with deferred rights of exercise.
Breach of Contract
It follows from this that, at the date of termination of his employment, Mr Pettiona was entitled, pursuant to cl. 10(b) of the 1998 Plan, to exercise rights with respect to the remaining stock options within three months of 28 November 2001. Advent took the position, as it did before me, that this was not available to him. In doing so, it breached the terms of the option. In his statement of claim Mr Pettiona seeks, first, a declaration that he is entitled to a grant of the 28,800 options from Advent. This is clearly inappropriate for these options were, as I have found, granted to him in 1998. Likewise, his second relief is inappropriate. This is for an order that Advent grant him these options. Passing then to paragraph G of the prayer for relief, his claim is for damages.
As to this claim, Mr Pettiona said that, had Advent permitted him to exercise his remaining options, he would have exercised them at the exercise price of $US12.42 and sold the shares as soon as they were available, as he had done in the past. His calculation of the profit he would have earned from this is set out in Schedule 2 to his witness statement. The lost profit so calculated is $US1,083,456 which is converted at the then prevailing exchange rate to $A2,076,381.75. This is a fairly conventional claim for common law damages representing the profit lost by the plaintiff by reason of the defendant’s failure to deliver a profitable thing.
In a supplementary written submission, counsel for Advent drew my attention to Ronnoc Finance v Spectrum Network Systems Ltd[23]. In this case, which bears some resemblance to the present, Santow J concluded that, where a plaintiff claims damages for the loss of bargain in a contract for the purchase of share options, the damages must be assessed when the contract is terminated rather than at date of breach, for the bargain is not lost until the contract is at an end. Such a principle has no application to the present case. It is clear that the employment agreement has terminated. Having regard to cl. 10(b) of the 1998 Plan, Mr Pettiona’s rights of exercise also terminated three months later. This is not a claim for damages for loss of bargain, but rather, one for loss of an opportunity to win a profit. The unchallenged evidence is that Mr Pettiona would have exercised his option within this period and disposed of the shares issued under the option agreement at a price greater than the exercise price. The damages which are sought in the present case is a sum to compensate him for the profit which he would have won had Advent performed its contract.
[23](1997) 45 NSWLR 624
Counsel for Mr Pettiona offered two alternative methods of assessing this loss. Given that the price of the Advent shares fell in 2002, they produce strikingly different results. The first measure was that which I have mentioned, namely the loss suffered on the basis that the outstanding options might have been exercised and the shares sold within the three month period after termination of employment. The second was that he might only have exercised the option progressively on a monthly basis as before, so that, even now, not all of the options might have been exercised. Consistent with my interpretation of the contract, I conclude that the former is the correct approach. Clause 10(b) of the 1998 Plan prevents the optionee from exercising an option after the three month period has expired so that he cannot do so after February 2002.
I conclude, therefore, that the proper measure of damages is the sum set out in Schedule 2 so that there should be judgment for the plaintiff in the sum of $2,076,381.75 in Australian currency.
This is sufficient to dispose of the case. Nevertheless, in deference to counsel’s submissions and in case this proceeding might go further, I will briefly venture my views on the alternative claims.
Rectification
The facts as I find them are briefly as follows.
When the agreement in principle for the sale was settled in October 1998 Mr Pettiona was to receive for his shares and the business underlying them a sum of money for the shares and an employment agreement with the US company. This employment agreement was for three years minimum with a salary of $A280,000 per annum plus performance bonus and 24,000 options in Advent. This was, as Mr Pettiona described it, his package. Although there was no concluded or binding agreement entered into before the formal agreements were executed on 29 November 1998, these essential elements of the package were settled between the negotiators and remained until contract.
For some reason which was never fully explained, Stephen Curtain, the solicitor for Mr Pettiona who was looking after the employment agreement, overlooked the option component in the employment package until the last moment. This was when Melissa Hollatz, the Californian solicitor for Advent, had already prepared final drafts. Ms Hollatz had been content to leave the option provision out of the employment agreement because, as she told me, she understood the options would be granted in any event. At the request of Mr Curtain, however, she included them in cl. 4(c) in the 25 November 1998 draft. There was no query or objection to the terms of this new clause and the employment agreement was executed in this form on 29 November. I infer that Ms Hollatz was familiar with the terms of the 1992 Plan which is referred to in cl. 4(c). John Lawrence O’Callaghan, the solicitor for Mr Pettiona who was concerned with the share sale agreement, said that on receipt of the 25 November draft he discussed the options clause with Mr Curtain. Mr Curtain observed that it was vague but the two solicitors decided not to hold up the execution of the sale documents on this matter. None of Mr Pettiona nor his solicitors had seen the 1992 stock option plan so that, at the date of contract, they had no knowledge of any qualification on the rights imposed by it upon the options to be granted. Mr Pettiona nonetheless executed the share purchase agreement and the employment agreement four days later.
The claim for rectification depends upon the existence of a continuing concurrent intention of the parties existing at the date of the execution of the agreement. As pleaded,[24] it is said that the employment agreement failed to record the terms of the agreement entered into on 19 October 1998 and recorded in the heads of agreement of that date. I have found that no concluded agreement was reached at that time for there remained a number of important matters yet to be resolved between the negotiators. Alternatively, it is said that Mr Pettiona, at the time of entering into the employment agreement, believed that he was to receive a vested, that is, an unconditional grant of 24,000 stock options.[25] The state of mind of Advent on this matter falls to be determined from what was said and done by its representatives. Nothing was said as to vesting. Accepting that Mr Lichtenwald and Mrs Hollatz were familiar with the terms of the 1992 Plan and the 1998 Plan, there is, nonetheless, no evidence to suggest that they understood that unvested options were to be granted. Indeed, the terms of the Board’s resolution of 23 November shows that Advent itself did not understand that unvested options were to be the subject of the grant. In this regard, this resolution pre-dates by one or two days the insertion of cl. 4(c) in the draft employment agreement.
[24]Statement of Claim, para. 10C
[25]Statement of Claim, para. 10F
In final submissions, counsel for Mr Pettiona contended that, at the date of execution of the employment agreement, the concurrent intention of the parties[26] was that the options were to be vested options. I find this to be the case so that, if it had been necessary, rectification of cl. 4(c) might be granted by the insertion of the word “vested” before the word “options” and after the figures “24,400”.
[26]Hooker Town Developments Pty Ltd v Director of War Service Homes (1973) 47 ALJR 320 at 324
Other Contentions
It is not necessary that I consider the further alternative submissions put on behalf of Mr Pettiona. These are based on misleading and deceptive conduct and estoppel. I say nothing further about them.
Conclusion
As I have indicated, I propose that there be judgment for the plaintiff for damages in the sum of $2,076,381.75 and interest together with costs including reserved costs.
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