Virginia Lawyers Weekly VA Lawyers Weekly
Where a former executive claimed a company owed him severance pursuant to a change in a control provision of his executive agreement after the death of the company’s owner, his argument failed because the death did not trigger a change in control. Even though the owner’s 44% share of the company stock was transferred into a trust benefiting his widow, she did not become a beneficial owner of the shares upon her husband’s death and the executive was terminated before the shares were transferred.
Background
Steve Hudson Park, a former executive of defendant Electro-Mechanical Corp., or EMC, claims that EMC owes him a severance payment pursuant to a change in control severance agreement.
In 2015, EMC entered into change in control severance agreements with all executives at the vice president level and higher. On Sept. 21, 2016, Francis Lee Leonard died. At the time of his death, F. Leonard owned 44.16% of EMC’s stock. His will provided that upon his death, his shares of EMC would be transferred into a trust called the marital business share. F. Leonard’s widow, Jacqueline Leonard was the income beneficiary of the marital business share.
At no time relevant to this case did F. Leonard own “securities of [EMC] representing 50% or more of the total voting power represented by [EMC]’s then outstanding voting securities.” Therefore, the transfer of his shares could only serve to make the recipient a majority owner of EMC, for purposes of establishing a change in control, if the recipient was already the beneficial owner of approximately 6% or more of EMC stock. At the time of F. Leonard’s death, Jacqueline directly owned 24.22% of EMC’s outstanding stock.
Park contends that when F. Leonard died, Jacqueline became the beneficial owner of his 44.16% stake in EMC by virtue of being the income beneficiary of the marital business share. According to Park, Jacqueline’s beneficial ownership interest in her late husband’s shares, combined with her outright ownership of 24.22% of EMC’s outstanding stock, gave her a majority ownership interest.
Importantly, however, Jacqueline sold her 24.22% of the shares to her children on Dec. 31, 2016, before F. Leonard’s shares had been distributed from his estate into the marital business share. Thus, by the time F. Leonard’s shares were transferred to the co-trustees, Jaqueline did not own any other shares of EMC.
Analysis
Park repeatedly states that Jacqueline did not become a beneficial owner of F. Leonard’s shares by virtue of her role as a co-executor of his estate. Rather, Park focuses on Jacqueline’s status as income beneficiary of the marital business share. There are two key problems with Park’s legal theory.
First, F. Leonard’s shares were not transferred from the estate into the marital business share until several months after Park was terminated. That transfer, then, cannot have constituted a change in control that would entitle Park to recover anything under the change in control severance agreement. Park attempts to get around this fact by asserting that an estate is merely a legal mechanism and an estate cannot own anything. Based on this logic, Jacqueline became a beneficial owner of the shares upon F. Leonard’s death because under his will, she would be the income beneficiary of the trust that would eventually, at some future time, hold the shares.
But the will provided that the residue of the estate would not be distributed until after the estate’s debts and costs had been paid. There was thus no guarantee of exactly how many shares would be distributed to the marital business trust or when that distribution might occur. The court rejects Park’s argument that Jacqueline became a beneficial owner of F. Leonard’s shares upon her husband’s death or at any other point before the transfer of the shares.
The second fatal flaw in Park’s theory of the case is that Jacqueline, as income beneficiary of the marital business share, did not have the power to vote the shares held by the trust, or the power to direct how they would be voted. Although Park argues that a provision of F. Leonard’s will gave Jacqueline the power to direct the voting of the shares in the marital business share, it did no such thing. That provision only allowed Jacqueline to direct the marital business share to sell the EMC stock if it ceased producing income. In any event, the problem remains that F. Leonard’s shares were not held in the marital business share until after Park was terminated.
Plaintiff’s motion for summary judgment denied. Defendant’s motion for summary judgment granted.
Park v. Electro-Mechanical Corp., Case No. 1:19-cv-00019, Dec. 2, 2020. WDVA at Abingdon (Jones). VLW 020-3-589. 12 pp.
