Merrill Wins Appeal with Reversal of Lower-Court Ruling

The Fifth Circuit U.S. Court of Appeals reversed a ruling that allowed John Young, a former trader at Merrill Lynch, to be awarded benefits from the firm’s “Long-Term Incentive Compensation Plan for Managers and Producers" after he resigned from the firm.

According to Merrill Lynch, by resigning from the firm, Young lost his right to the plan. He filed suit, and the district court decided that Merrill Lynch’s interpretation of the plan was arbitrary.

Young began working at Merrill Lynch as a structured credit trader in 2006, and held the title of managing director. While at the firm he participated in the plan; it was designed to provide long-term incentives to key employees, to attract and retain top-flight employees, to encourage long-term stock ownership by employees, and to align the interests of those employees with those of the stockholders.

At issue were 14,802 Restricted Units—each providing the right to receive one share of Merrill Lynch stock or its cash value—granted to Young in 2006, which he never cashed out. Merrill reports that in general, employees lose their rights to Restricted Units not exercised when they leave the company. Young asserted that he had a right to his Restricted Units under an exception to that general rule, stating that he left the firm for “Good Reason” after a “Change in Control.” These are both contractual terms drawn from the plan.

Merrill Lynch executed an agreement and plan of merger with Bank of America on September 15, 2008, and the merger was to occur—and did occur—on January 1, 2009. Young received his 2008 bonus in December 2008, after the merger agreement was signed, but before the merger was consummated. He resigned from Merrill Lynch in February 2009, roughly one month after the merger had occurred.

Young asserted that he had resigned for "Good Reason" following a "Change in Control." The parties did not dispute on appeal that Young would have had “Good Reason” if the December 2008 bonus, paid between the merger agreement’s signing and the consummation of the merger, had been instead paid after January 2009, when the merger occurred.

The parties have focused on whether the date of the Change in Control applicable to Young’s situation should be the date that the merger agreement was signed or the date that the merger occurred.

Merrill Lynch responded to Young’s request for his Restricted Units by stating that it construed the date of Change in Control relevant to Young as the date of the consummation of the merger—which occurred after his bonus was paid. Thus, Merrill Lynch contended, his bonus could not be linked to the Change in Control and therefore Good Reason was not established. In a second letter Merrill Lynch denied that § 8.3 controlled, stating that the provision relates only to those employees who “are terminated or resign for good reason prior to [the] closing of a transaction” by “‘deem[ing]’” the transaction to have occurred earlier.  

The parties filed cross-motions for summary judgment. The district court granted summary judgment in favor of Young and denied Merrill Lynch’s motion. It recognized that New York grants highly deferential review of a determination made by a committee vested with sole interpretive authority. Nonetheless, the court determined that the requisite decrease in Young’s bonus had been demonstrated and that the express language of § 8.3 compelled a determination that a Change in Control occurred on the date the merger agreement was signed. This provided Young Good Reason for his resignation, the district court concluded. The court applied the same date to calculate the Units’ Pre-CIC Value. 

The Appeals Court ruled that under the plan the committee had the authority to interpret the plan’s terms. The court notes that Young failed to carry his “heavy burden” in showing that “no honest tribunal could have construed the Plan in any manner but his proffered reading and that Merrill Lynch has advanced an arbitrary reading,” and therefore reversed the ruling in favor of Merrill Lynch.  

The case is Young v. Merrill Lynch Co. Inc., 5th Cir., No. 10-20455.