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Does a Requirement to Pay “Target Variable Compensation” Include Equity Awards?

by   |   April 11, 2019

In Batty v. UCAR International Inc. et al the Delaware Court of Chancery considered the terms of a severance agreement.  The agreement, which was entered into in 2000, set the compensation that plaintiff Batty, who was employed by certain of the defendants for 34 years, would receive from the defendants in the event he resigned for “good reason” following a “change in control.”  A change of control occurred in 2015, and Batty resigned in early 2017.  The parties did not dispute that the change of control occurred or that Batty’s resignation triggered his entitlement to compensation under the agreement, but the amounts payable were at issue.

Section 2(a)(ii) of the agreement entitled Batty to the amount of his “accrued Incentive Compensation” upon his resignation. Section 2(a)(ii) specifically requires a defendant to pay accrued amounts of Batty’s “target variable compensation payment.” Batty alleged that the term “target variable compensation” included equity awards, and that defendants breached the agreement by failing to pay him his equity awards that accrued in 2016 and 2017. Around $1.5 million was at stake.

The defendants argued that “accrued Incentive Compensation” was limited to cash compensation and thus excluded equity awards. The defendants relied on Section 1(f), which defined “Incentive Compensation” as “any compensation, variable compensation, bonus, benefit or award paid or payable in cash under an Incentive Compensation Plan.”  According to the defendants, Section 1(f)’s phrase “paid or payable in cash” modifies all preceding nouns (“compensation, variable compensation, bonus, benefit or award”). In the alternative, the defendants argued that they prevail even if “paid or payable in cash” modifies only the nearest noun, “awards,” because equity awards are “awards” and thus subject to the cash limitation. To bolster their interpretation, the defendants point to the definition of “Incentive Compensation Award,” which too is limited to “cash payment or payments awarded to [Batty] under any Incentive Compensation Plan.”

The Court noted the defendants’ interpretation of Section 2(a)(ii) was reasonable, but that it was not the only reasonable interpretation. Just as conceivable, according to the Court, was that the term “Incentive Compensation” could mean certain items that may be paid in cash or equity (“compensation, variable compensation, bonus, benefit”) as well as one item that is only paid or payable in cash (“award”). According to the Court, under this interpretation, regardless of whether the equity awards are “paid or payable in cash,” they would be included in Batty’s accrued Incentive Compensation.

The Court noted it could not grant the defendant’s motion to dismiss because it may not “choose between two differing reasonable interpretations of ambiguous provisions.” Rather, “any ambiguity must be resolved in favor of the nonmoving party.”  The Court said the defendants are “not entitled to dismissal under Rule 12(b)(6) unless the interpretation of the contract on which [its] theory of the case rests is the ‘only reasonable construction as a matter of law.” According to the Court, because Section 2(a)(ii) is susceptible to multiple reasonable interpretations, the defendants’ motion to dismiss failed.

While many will find the Court’s decision as unsatisfying or possibly wrong, it highlights the need for careful drafting to avoid disputes.