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Allegations that DoubleClick fraudulently failed to disclose restrictions on an employee’s ability to exercise stock options in the event his employment was terminated were rejected June 26 by the U.S. District Court for the Southern District of New York, which found that the provisions of the employment offer and the option agreement gave notice to the employee that the grant of stock options was subject to vesting requirements and restrictions on post-termination exercisability ( Butvin v. DoubleClick Inc., S.D.N.Y., No. 99 Civ. 4727 (JFK), 6/26/00). In May 1996, Nikolay Butvin, a computer software engineer, met with three senior officers of New York City-based DoubleClick Inc. During the meeting, Butvin was told that he would receive stock options if he went to work for DoubleClick. After the meeting, Butvin received a letter confirming an employment offer, which stated: “In accordance with the DoubleClick option plan, you will receive 13,000 shares of stock. . . .” In July 1997, Butvin exercised options to purchase 25 percent of his option grant, worth more than $1.3 million. On Feb. 18, 1998, DoubleClick made an initial public offering, and its stock began trading. However, the day before the IPO, Butvin was informed that his employment would be terminated as of March 17. He alleged that he was terminated without “good cause.” In June 1998, Butvin attempted to exercise the remainder of his options. However, DoubleClick rejected the request, informing him that “Since your employment with DoubleClick ended with only one year vested, [and those options were previously exercised,] you are not eligible to exercise any additional portion of your option grant.” Butvin asserted that the company made misrepresentations to him regarding the number of options to which he was entitled. In December 1997, DoubleClick informed Butvin that the number of options he owned was reduced by half due to a reverse stock split. However, Butvin argued that the number of his options had actually increased due to an increase in the number of common shares outstanding. He argued that he was unaware that the company’s representation regarding the stock split was false until the company rejected his attempt to exercise the options. In June 1999, Butvin brought an action to recover damages arising for alleged violations of federal securities law and common law. The company moved to dismiss the complaint for failure to state a claim. SECURITIES CLAIM TIME-BARRED DoubleClick first asserted that Butvin’s claims for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 were time-barred. The court agreed, in an opinion by Judge John F. Keenan. The Act, the court explained, requires an action to be brought “within one year after the discovery of the facts constituting the violation and within three years after such violation.” An objective test is employed to determine whether a plaintiff is placed on notice, and dismissal is appropriate when the facts from which knowledge may be imputed are clear from the pleadings, the court said. The fraud alleged by Butvin consisted of DoubleClick’s failure to disclose the restrictions on Butvin’s ability to receive the stock or exercise his options in the event his employment was terminated. However, the court found, “Plaintiff was placed on inquiry notice, if not actual notice, of Defendant’s alleged fraud more than a year before bringing this action.” The employment offer letter, the court reviewed, stated that the shares would be received “in accordance with the DoubleClick option plan.” The option agreement, in turn, provided that the option “is granted pursuant to the [Stock Option] plan and is subject to the terms and conditions thereof, which are incorporated herein by reference. . . . The Optionee hereby acknowledges receipt of, or access to, a copy of the [Stock Option] Plan.” It also provided that, should the optionee be terminated other than for good cause, the option could be exercised at any time within three months after the optionee’s termination, subject to the vesting schedule. “The Court finds that the provisions of the Employment Offer and the Option Agreement gave notice to Plaintiff that he may not have been given an indefeasible equity interest but rather a grant of stock options subject to vesting requirements and restrictions on post-termination exercisability,” the court said. The court concluded that the securities fraud claim was time-barred, given that Butvin should have known — or should have made an inquiry — about the indefeasibility of his option based on the documents he signed and acknowledged receiving. Butvin’s allegations of misrepresentation about the number of options he owned following the reverse stock split, the court found, were not pleaded with sufficient particularity. The claim, the court said, “fails to identify the speaker, state where and when the statement was made, or to explain why the statement was fraudulent.” OTHER CLAIMS The court also rejected Butvin’s common law fraud claim, finding that it merely restated his claims for breach of contract, and that he was not justified in relying on the false statements allegedly made in connection with DoubleClick’s offer of employment. To state a claim for fraud based on a statement that relates to a contract, the plaintiff must allege a legal duty separate from the duty to perform under the contract, assert a misrepresentation extraneous to the contract, or seek damages that are unrecoverable as contract damages, the court explained. Butvin’s allegation that DoubleClick fraudulently failed to adjust the number of his options after the reverse stock split “does not allege a claim for fraud that is sufficiently distinct from the breach of contract claim to withstand the motion to dismiss,” the court said. The allegation that DoubleClick fraudulently failed to disclose restrictions on the option grant, the court continued, must also be dismissed. Butvin, it said, “was not justified in relying on the fraudulent statements allegedly made in connection with his employment offer.” The employment offer, it pointed out, made it clear that the option grant was subject to the specific terms of the stock option plan. Butvin also alleged that DoubleClick breached both the option agreement and the employment offer by failing to convey the promised stock. According to Butvin, the option agreement was breached when DoubleClick refused to permit him to exercise his options after his employment was terminated without good cause. The option agreement states, in Paragraph 4(a), that an option may not be exercised by an employee after the employee ceases to be employed. However, if termination is for other than “good cause,” the option may be exercised at any time within three months after termination. In contrast, Paragraph 4(b) states that if an optionee ceases to be employed by reason of death or disability, the option may be exercised within 12 months, “but only with respect to Option Shares which were exercisable at the time employment ceased.” Butvin argued that, because Paragraph 4(b) includes the language “only with respect to Option Shares which were exercisable at the time employment ceased,” and Paragraph 4(a) contains no such restriction, an employee terminated without good cause may exercise all options regardless of whether they were vested at termination. The court disagreed. The option agreement, it pointed out, stated that in the case of an inconsistency between the agreement and the stock plan, the plan would govern. And, it noted, the plan clearly stated that options may be exercised after termination only to the extent those options were vested. As a result, the court said, DoubleClick did not breach the option agreement when it refused to permit exercise of the unvested options. Nor did DoubleClick breach the terms of the employment offer, the court continued. The offer, it pointed out, clearly stated that the grant of options was “In accordance with the DoubleClick option plan.” “[B]ecause Defendant complied with the terms of the Stock Option Plan, Defendant did not breach the Employment Offer,” it said. Accordingly, the court granted DoubleClick’s motion to dismiss the complaint in its entirety. However, it granted Butvin’s request for leave to amend so as to remedy pleading deficiencies.

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