Smith Barney's 'Golden Handcuffs' Incentive Plan Gets Court's Blessing - www.law.com - June 25, 2008

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New Jersey's Supreme Court on Wednesday
gave its imprimatur to employee stock-purchase compensation plans that
carry forfeiture provisions if participants quit before fully vesting.

The justices, in Rosen et al. v. Smith Barney, A-49-07,
affirmed an appellate court's sustaining of such a plan against charges
that it violated the state's Wage and Hour Law, N.J.S.A. 34:11-4.1 et
seq.

Smith Barney Inc. instituted its Capital Accumulation Plan in 1989
to combat stockbroker turnover, which was then rampant in the industry.
Brokers could elect to have part of their compensation diverted to
purchase restricted shares of stock in Smith Barney's parent company,
Citigroup Inc., at 25 percent below market price.

The catch was that stock ownership was not fully vested until
completion of a two-year period, during which participants could not
sell their shares though they could receive dividends and exercise
voting rights. Employees who quit or were let go prior to the vesting
period forfeited their interests in the unvested stock.

Two brokers who resigned within their vesting periods, Melvin Rosen
and James Fox, brought a class action on behalf of themselves and
others subject to the forfeiture provision. A trial judge ruled in
their favor on summary judgment, finding the forfeiture of earned wages
invested in the plan "contradicts public policy, which requires that
employees receive their earned compensation."

A divided Appellate Division panel reversed. Judges Marie Lihotz and
Ronald Graves found the plan legal because the contract was in writing,
all terms were fully disclosed prior to enrollment, participation was
optional, risk of forfeiture was disclosed unambiguously and the plan
investment provided immediate beneficial tax treatment and stock
ownership benefits.

But Judge Harvey Weissbard dissented, calling the plan "a
restrictive covenant of the broadest type imaginable," since it was
meant to stop brokers not only from defecting to competitors but from
leaving the company at all.

The court on Wednesday agreed with the appeals court's majority,
saying programs like Smith Barney's are expressly authorized by the
wage and hour statute's exceptions for programs that offer incentives
for participation.

"The CAP ... was entirely voluntary and its terms were fully
disclosed to each of them," the court wrote per curiam. "Plaintiffs'
interest in the CAP was defined, and both the indicia of and control
over that interest, through receipt of dividends and the ability to
exercise voting rights, was immediate."

The CAP is designed to offer the maximum benefits to participants
through reduced share purchase prices and deferred taxes and still
satisfy the requirements of the portions of the Internal Revenue Code
authorizing such plans, 26 U.S.C.A. §§ 83, 409A(a)(1), the court said,
adding that the revenue code and the state's wage and hour statute are
"in harmony" with each other.

Nor was New Jersey public policy violated. "Moreover ... we reject
the assertion that the CAP's inclusion of, and defendant's potential
invocation of, a forfeiture provision, operates as a penalty that
therefore violates public policy in some fashion," the court said.

Smith Barney's lawyer, Robert Del Tufo, says he is pleased the court
saw the stock plan for what it is. "It's entirely voluntary," says Del
Tufo, of New York's Skadden, Arps, Slate, Meagher & Flom.

Plaintiffs lawyer Bruce Nagel, of Roseland, N.J.'s Nagel Rice, did not return a reporter's call seeking comment.

Justices Helen Hoens, Jaynee LaVecchia, Roberto Rivera-Soto and John
Wallace Jr. participated in the ruling, along with temporarily assigned
Appellate Division Judge Edwin Stern. Chief Justice Stuart Rabner and
Justices Barry Albin and Virginia Long recused.