In a recent and significant decision, the Chancery has determined that former executives of a company, specifically SeaWorld Entertainment, Inc., are not entitled to the equity awards that were granted to them under their separation agreements. SeaWorld Entm’t, Inc. v. Andrews, C.A. No. 2020-0955-NAC (Del. Ch. May 19, 2023)
The case revolved around equity agreements in which unvested equity awards were granted to employees. Central to these agreements was the clause according to which these equity awards would vest only if certain conditions were met. These included the company’s controller selling its stock above a specific threshold price, and the condition that the awardees should still be employed with the company at the time of the sale.
However, the situation became contentious when the executives separated from the company. A critical factor that was considered by the Chancery was the terms of the underlying incentive compensation plan. As per this, the company exercised sole discretion to amend any term of the equity agreements. This led to a conflict with the former executives who claimed they were still entitled to the awards as defined in their separation agreements.
According to the court’s ruling, despite the separation agreement outlining the executive’s entitlement to the unvested awards, such terms could be amended according to the unrestrained discretion vested with the company according to the original equity agreement. The Chancery thus, ruled in favour of the company, denying the former executives their claimed equity awards.
This decision primarily underscores the significance of clearly defining terms and conditions in equity agreements and separation agreements. It also highlights the weightage given to the powers held by companies in terms of amending these agreements, thereby playing a central role in such disputes.