United States Court of Appeals
For the First Circuit
No. 07-1549
MARIO MARIASCH,
Plaintiff, Appellant,
v.
THE GILLETTE COMPANY,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
Before
Lipez, Circuit Judge,
Cyr, Senior Circuit Judge,
and Howard, Circuit Judge.
Alvin S. Nathanson, with whom Nathanson & Goldberg, PC was on
brief for appellant.
Richard P. Ward, with whom David C. Potter and Ropes & Gray,
LLP were on brief for appellee.
March 27, 2008
LIPEZ, Circuit Judge. In this diversity case, Mario O.
Mariasch, a citizen of California, claims that The Gillette
Company, his former employer and a Delaware Corporation, wrongfully
rejected his attempt to exercise stock options that he acquired in
1995 and 1996 as part of his executive compensation package. After
Mariasch retired from Gillette on April 22, 2002, he had three
years to exercise these options pursuant to Gillette's 1971 Stock
Option Plan ("Stock Option Plan"). Mariasch tried to exercise the
options seven days after the three-year period lapsed and was
rebuffed by Gillette. He now argues that principles of contract
law and equity required Gillette to accept this late exercise.
The district court granted summary judgment for Gillette,
primarily on the authority of our decision in First Marblehead
Corp. v. House, 473 F.3d 1 (1st Cir. 2006), where we held that
Delaware law requires the strict application of the terms and
conditions of a board-approved stock option plan. We agree with
the district court's analysis and affirm its grant of summary
judgment.
I.
The following facts are drawn from the pleadings and
depositions. Where the facts are disputed, we view the record in
the light most favorable to Mariasch, the nonmoving party. First
Marblehead, 474 F.3d at 3.
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Before retiring in 2002, Mariasch worked at Gillette for
over thirty years, rising to the level of Senior Vice President for
New Business Development at Oral-B Laboratories, a Gillette
subsidiary. As part of his compensation package for most of his
tenure, he received two types of Gillette stock options --
incentive stock options ("ISOs") and non-qualified stock options
("NQSOs").1 He acquired over 210,000 shares of Gillette stock by
exercising these options.
The stock options at issue here are the NQSOs granted to
Mariasch in 1995 and 1996. The terms governing the stock options
were set forth in the 1971 Stock Option Plan, which provided that
active employees must exercise their NQSOs within ten years of the
date that the options were issued and that retired employees must
exercise their options within three years of their official
termination date.2
In 2000, as part of Gillette's 1998 Reorganization and
Realignment Program, Mariasch's position as a senior vice president
was eliminated and his employment was terminated. On July 10,
2000, Mariasch and Gillette entered into a Termination Settlement
1
Under the Internal Revenue Code, ISOs and NQSOs are treated
differently for tax purposes, with the former having more favorable
tax treatment in exchange for greater restrictions on their use.
I.R.C. §§ 421-23.
2
The Stock Option Plan dictates that if the NQSOs had been
issued prior to April 21, 1994, a retiree would have only two years
from the termination date to exercise those options.
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Agreement ("Termination Agreement") that provided for Mariasch to
receive his base pay during the settlement period -- the sixty-
eight weeks following his release date. Pursuant to the
Termination Agreement, the close of the settlement period, April
22, 2002, would be deemed his termination date and retirement
date.3 Mariasch would then have three months from that date to
exercise his ISOs4 and three years to exercise his NQSOs. The
Termination Agreement included a Massachusetts choice-of-law
provision.
On April 29, 2005, Mariasch attempted to exercise his
disputed NQSOs by contacting the plan agent, Merrill Lynch, who
informed him that the options had expired on April 21, 2005. Upon
hearing this, Mariasch emailed Gillette, writing, "I made an honest
mistake on the due date to exercise two stock options that were due
three years after retirement." Mariasch says that he thought his
retirement date was May 1, 2002 because in 2002 he received a pay
stub that listed May 1, 2002 to May 31, 2002 as a payment period.
Also, Mariasch states that he failed to exercise the disputed NSQOs
before the expiration date because he did not receive the usual
"friendly reminder" letter or a call from either Gillette or
3
Although Mariasch's departure was not voluntary, the parties
agree that Mariasch's departure would be treated as a retirement
for the purposes of the Stock Option Plan. Both parties use
termination date and retirement date interchangeably.
4
Mariasch exercised his ISOs in a timely manner and there is
no dispute regarding these options.
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Merrill Lynch telling him that they were about to expire. He
asserts that Gillette had sent him a "friendly reminder" letter
prior to the expiration of stock options for over twenty years and
then abruptly stopped sending him a reminder in 2005.
After Gillette persisted in its refusal to allow him to
exercise his 1995 and 1996 options, Mariasch filed suit against
Gillette in the federal district court in Boston. On assorted
theories, he sought a declaratory judgment that he should be
permitted to exercise the disputed options. After Gillette moved
for summary judgment, the district court granted the motion,
largely on the basis of our prior decision in First Marblehead.
Mariasch now appeals.
II.
We review the district court's grant of summary judgment
de novo. First Marblehead, 473 F.3d at 5. Summary judgment is
proper if, viewing the record in the light most favorable to the
nonmoving party, "there is no genuine issue as to any material fact
and . . . the moving party is entitled to judgment as a matter of
law." Fed. R. Civ. P. 56(c); First Marblehead, 473 F.3d at 5.
"Once the moving party avers the absence of genuine issues of
material fact, the nonmovant must show that a factual dispute does
exist, but summary judgment cannot be defeated by relying on
improbable inferences, conclusory allegations, or rank
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speculation." Ingram v. Brink's, Inc., 414 F.3d 222, 228-29 (1st
Cir. 2005).
A. Choice-of-Law
In this diversity case we must follow the applicable
state laws. See, e.g., Phoung Luc v. Wyndham Mgmt. Corp., 496 F.3d
85, 88 (1st Cir. 2007). The parties dispute which state's laws
should apply, with Mariasch contending that Massachusetts law
applies to his claim and Gillette responding that Delaware law
applies. To determine which state's laws are applicable, we look
to the choice-of-law jurisprudence of Massachusetts, the forum
state. Lexington Ins. Co. v. Gen. Accident Ins. Co. of Am., 338
F.3d 42, 46 (1st Cir. 2003)("In determining what state law is
relevant, a federal court must apply the choice-of-law framework of
the forum state.").
Massachusetts applies the internal affairs doctrine,
which "recognizes that only one State should have the authority to
regulate a corporation's internal affairs - matters peculiar to the
relationships among or between the corporation and its current
officers, directors, and shareholders - because otherwise a
corporation could be faced with conflicting demands." Edgar v. MITE
Corp., 457 U.S. 624, 645 (1982). The state with authority over a
corporation's internal affairs is the state of incorporation.
Harrison v. NetCentric Corp., 744 N.E.2d 622, 628 (Mass. 2001)
("Traditionally, we have applied the law of the State of
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incorporation in matters relating to the internal affairs of a
corporation . . . ."); see also Mass. Gen. Laws ch. 156D, § 15.05(c)
("[A] foreign corporation organization and internal affairs and the
liability of its stockholders and directors shall be governed by the
laws of the jurisdiction under which it is organized."). Since
Gillette was incorporated in Delaware, Gillette's internal affairs
are governed by Delaware law.
Mariasch's claims fall within the purview of the internal
affairs doctrine because stock option plans are considered matters
pertaining to the internal affairs of a corporation. In Rogers v.
Guaranty Trust Co. of New York, the Supreme Court decided that the
plaintiff's claims must be assessed under New Jersey law, the state
in which the defendant corporation was incorporated, because
"[u]nquestionably the steps taken and proposed to formulate and
carry out the [stock option] plan constitute the conduct and
management of the internal affairs of the [] company." 288 U.S. 123,
129 (1933); see Fredericks v. Georgia-Pacific Corp., 331 F. Supp.
422, 424 (E.D. Pa. 1971) (explaining that when a stock option plan
is silent as to the applicable state law, courts have uniformly
determined the validity and construction of stock options by
applying the laws of the state of incorporation); Ellis v. Emhart
Mfg. Co., 191 A.2d 546, 550 (Conn. 1963) ("The issuance of stock
option plans by the defendant involves its internal affairs, and any
controversy resulting therefrom is controlled by [the law of the
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state of incorporation]."); Beard v. Elster, 160 A.2d 731, 735 (Del.
1960) ("The issuance of stock option plans by Delaware corporations
involves the internal affairs of a Delaware corporation and is,
therefore, controlled by the laws of Delaware."). Here, as
defendant argues, "Gillette's shareholders specifically approved how
many shares of Gillette stock could be issued under the 1971 Stock
Option Plan. Thus, issues relating to when one is entitled to the
issuance of stock pursuant to the 1971 Stock Option Plan affects
Gillette's relationship with the shareholders."
Nonetheless, Mariasch argues that the Stock Option Plan
is not subject to the internal affairs doctrine and the law of
Delaware since it was incorporated by reference into the Termination
Agreement, which says that "[t]his Agreement shall be governed by
and construed in accordance with the laws of the Commonwealth of
Massachusetts." Gillette correctly responds that Mariasch had the
benefits provided by the Stock Option Plan prior to becoming party
to the Termination Agreement. The purpose of the Termination
Agreement was to provide him with settlement pay and other benefits
that he did not previously have. As Gillette puts it, "The
additional pay and benefits were the consideration for a release of
all claims." Rather than incorporating the Stock Option Plan or
modifying its terms in any way, the Termination Agreement simply
referred to it "for detailed information on the exercise of Stock
Options." The Termination Agreement did delay Mariasch's retirement
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date, which had the effect of giving him more time to exercise his
options that had to be exercised within three years of retirement.
That limited interaction between the Termination Agreement and the
Stock Option Plan is a far cry from the incorporation that Mariasch
claims. Consistent with the internal affairs doctrine, we must
apply Delaware law when assessing Mariasch's claim that Gillette
should have permitted him to exercise his options beyond the
expiration date for such exercise.5
B. Applicability of First Marblehead
We addressed the law of Delaware as it applies to the
timely exercise of stock option plans in First Marblehead. There,
Gregory House, pursuant to a board-approved plan, had to exercise
his ISOs within three months of resigning from First Marblehead
Corporation. Id. at 3. Although House allowed the three month
period to lapse, he sought to exercise his options several years
later. Id. at 4. First Marblehead sought a declaratory judgment
5
Mariasch also argues that because the Termination Agreement
is a bilateral contract and the Stock Option Plan is incorporated
by reference, the disputed NQSOs are subject to the terms of a
bilateral contract. According to Mariasch, the deadlines in a
bilateral contract are strictly enforced only if the contract
explicitly states that time is of the essence. Since the
Termination Agreement has no such language, Mariasch argues that
the deadlines set forth in the Stock Option Plan and incorporated
by reference into the Termination Agreement should not be strictly
enforced. However, since we find that the Termination Agreement
does not incorporate the Stock Option Plan by reference and
Mariasch's interests in the disputed NQSOs are only subject to the
terms of the Stock Option Plan, we reject the bilateral contract
argument on this basis alone.
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that House's ISOs had expired three months after his resignation and
House filed a cross-complaint alleging that he should be permitted
to exercise his options on contractual and equitable grounds. Id.
After House lost at summary judgment, he appealed to us. Id. at 5.
In rejecting his contractual and equitable claims,6 we
noted that, pursuant to Delaware law, "every corporation may create
and issue . . . rights or options . . . such rights or options to
be evidenced by or in such instrument or instruments as shall be
approved by the board of directors." Del. Code Ann. tit. 8, §
157(a); see First Marblehead, 473 F.3d at 6. We added that Delaware
courts have observed that the issuance of corporate stock pursuant
to a written board-approved plan is "an act of fundamental legal
significance having a direct bearing upon questions of corporate
governance, control and the capital structure of the enterprise.
The law properly requires certainty in such matters." First
Marblehead, 473 F.3d at 6 (quoting STAAR Surgical Co. v. Waggoner,
588 A.2d 1130, 1136 (Del. 1991)). Relatedly, the strict enforcement
of a board-approved stock issuance plan serves the important policy
of "preserv[ing] the board's broad authority over the corporation
and . . . protect[ing] the certainty of investors' expectations
regarding stock." Id. (quoting Grimes v. Alteon, Inc., 804 A.2d
256, 258 (Del. 2002)). Therefore, Delaware courts have denied
6
House also raised successfully a negligent misrepresentation
claim that has not been advanced by Mariasch. First Marblehead, 473
F.3d at 9-11.
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claims for equitable relief "even in situations when that might
generate an inequitable result" because of the importance of strict
adherence to statutory requirements regarding the issuance of stock.
Id. (quoting Liebermann v. Frangiosa, 844 A.2d 992, 1004 (Del. Ch.
2002)).
Here, the Stock Option Plan provides for a Personnel
Committee with the authority to award ISOs and NQSOs to employees
of Gillette and its subsidiaries. In limited circumstances set
forth in the Stock Option Plan, the Personnel Committee can extend
the period in which an optionee may exercise his options.7 However,
the period within which a retired employee can exercise his NQSOs
is not subject to an extension by the Personnel Committee. The
Stock Option Plan provides without exception that retired employees
with NQSOs have three years from the date of termination to exercise
their options.
For all of the reasons cited in First Marblehead, this
option period must be strictly enforced.8 Requiring Gillette to
allow a deviation from the terms of the Stock Option Plan would
undermine the board's authority over the issuance of stocks, thereby
creating unpredictability for investors in contravention of Delaware
7
For example, the Stock Option Plan allows the Personnel
Committee to extend the period in which a voluntarily terminated
employee can exercise his NQSOs from seven days to three months.
8
Sensibly, Mariasch does not argue that First Marblehead is
distinguishable on the ground that ISOs were at issue there as
opposed to the NQSOs at issue here.
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law. Moreover, it would limit the Personnel Committee's ability to
allocate stock options to employees. Under the Stock Option Plan,
the reserved shares become subject to future grants when stock
options expire. If the deadlines for exercising stock options were
not strictly enforced, the Personnel Committee would not know how
many shares were available for grant.
Mariasch argues that First Marblehead does not apply to
his claims because the Stock Option Plan does not include a fixed
option period that must be strictly enforced. To support this odd
notion, he cites the word "may" in the clause which says that
options "exercisable at the time of the termination, may be
exercised within the period shown below" (emphasis added). In his
view, the word "may" means that the Personnel Committee had the
right to extend the three-year period for the exercise of NQSOs by
retired employees.9 This argument is unpersuasive. The word "may"
does not make the length of the option period permissive. Rather,
9
Mariasch also argues that the Personnel Committee could have
extended the exercise period for the disputed NQSOs to ten years.
He cites provisions from the Stock Option Plan in support of his
position, but these provisions are not applicable by their own
terms. The Stock Option Plan says: "Options granted to employees
are exercisable as determined by the Committee, except that the
maximum option period is ten years from the date of grant." This
reference to the ten-year option period pertains exclusively to
current employees and not retired employees like Mariasch.
Similarly, Mariasch quotes language that gives the Personnel
Committee authority to extend exercise periods to ten years for
employees who were discharged for cause. This provision is also
inapplicable to Mariasch since his termination was characterized as
a retirement.
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that word simply gave Mariasch the choice during the three-year
period to exercise his options. Mariasch had no contractual right
under Delaware law to exercise his NQSOs after the three years
lapsed.
C. Equitable Claims
We also apply Delaware law to Mariasch's equitable
claims. In First Marblehead we acknowledged that, in limited
circumstances, Delaware law might, on equitable grounds, permit a
brief extension in a stock option period which the corporation
should be estopped from denying. Id. at 8 (citing Ostler v. Codman
Research Group, Inc., 241 F.3d 91, 94 (1st Cir. 2001), where we
validated a two-day extension of the stock option exercise deadline
while noting that such "minor extension[s] of an option exercise
deadline . . . . to cope with last-minute emergencies" were rarely
allowed); cf. id. (denying House's request for an extension because
"[w]hile a two-day extension arguably would not frustrate
management's ability to make capital decisions with certainty, a
delay of years could have a significant impact"). Mariasch contends
that the circumstances in this case justify a brief extension of the
option period. Gillette, he says, engaged in inequitable conduct
when it ceased to provide him notice of the option exercise deadline
after twenty years of providing such notice. He also emphasizes
that he is only asking for a seven-day grace period.
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By virtue of his own testimony, Mariasch defeats his
claim of equitable estoppel. At his deposition, Mariasch was
presented with a letter dated March 21, 2002 from Gillette. The
first sentence read, "I have enclosed your retirement package as of
April 22, 2002." When questioned whether he understood that his
retirement date was April 22, 2002, Mariasch responded
affirmatively. Gillette's counsel later asked Mariasch, "But, when
you retired, you understood that you had to exercise them [the 1995
and 1996 NQSOs] within three years of your retirement date, right?"
Mariasch once again answered in the affirmative. Moreover, when
Mariasch attempted to exercise his disputed NQSOs by contacting the
plan agent, Merrill Lynch, who informed him that the options had
expired on April 21, 2005, he emailed Gillette the following
message: "I made an honest mistake on the due date to exercise two
stock options that were due three years after retirement."
Under Delaware law, "[t]o establish estoppel it must be
shown that the party claiming estoppel lacked knowledge or the means
of obtaining knowledge of the truth of the facts in question."
Waggoner v. Laster, 581 A.2d 1127, 1136 (Del. 1990). Based on
Mariasch's deposition testimony and the content of the email
Mariasch sent to Gillette, it is clear that Mariasch knew that the
disputed options lapsed on April 21, 2005. Mariasch must bear the
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responsibility for not acting on that knowledge.10 He cannot impose
the cost of his mistake on Gillette.11
Affirmed.
10
Mariasch's equitable estoppel claim fails on other grounds
as well. As noted earlier, Mariasch claims on appeal that he
failed to exercise the disputed NSQOs before the expiration date
because he did not receive the usual "friendly reminder" letter or
a call from either Gillette or Merrill Lynch telling him that they
were about to expire. He asserts that Gillette had sent him a
"friendly reminder" letter prior to the expiration of stock options
for over twenty years and then abruptly stopped sending him a
reminder in 2005. However, by his own admission, he was not
waiting for a "friendly reminder" when he attempted to exercise his
options on April 29, 2005. Thus, his equitable estoppel claim
predicated on alleged reliance on receiving "friendly reminders"
from Gillette is unavailing.
11
Citing Delaware cases for the proposition that "equity
abhors a forfeiture," see, e.g., Hillman v. Hillman, 903 A.2d 798,
812 n.43 (Del. Ch. 2006), Mariasch argues that he is entitled to
equitable relief from the forfeiture of his stock options. We
disagree for the same reason that Mariasch does not prevail on his
equitable estoppel claim -- he is responsible for his own loss.
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