Corporations – Employee Stock Option Plans – Nature of Consideration Required for Valid Plan

Restricted stock option plans, approved by a majority of the stockholders, were adopted by the defendant corporation in 1951 and 1952 pursuant to, and in compliance with, section 218 of the Revenue Act of 1950, for the purpose of” … providing an incentive to participating key executive employees in the form of an opportunity to acquire a greater proprietary interest in the corporation and thus stimulate their efforts in the corporate welfare …. ” The options were effective and exercisable anytime from the date of issuance to the end of a five-year period, with provision for termination three months after leaving the company’s employ. The options were non-transferable and optionees stated that they exercised the options for investment only and not for distribution. In 1953 the directors passed a resolution pursuant to the amended Delaware Corporation Law that it was their opinion that the corporation had received and would receive good and sufficient consideration for the options granted under the 1951 and 1952 option plans, and employment contracts were obtained from all option holders, dating from the time of the grant of options. In a stockholder’s representative suit, held, the stock options were invalid for lack of consideration. At the time of granting the option, there must be conditions in the option plan, or in the circumstances, which reasonably assure the corporation that it will receive the benefit for which it bargained. Later resolutions or employment contracts cannot remedy the lack of consideration in the option grants. Frankel v. Donovan, (Del. Ch. 1956) 120 A. (2d) 311.