Wharton v. Fidelity-Baltimore National Bank

Niles, Chief Judge of the Supreme Bench of Baltimore City, by special assignment, delivered the opinion of the Court. The question presented in this case is whether a director of a corporation is an “employee” of, or “employed” by, or in ¹⁷⁹ the “employment” of the corporation. The case arises upon the interpretation of a restricted stock option agreement and related documents, under the terms of which the option is not exercisable until the holder “has been employed” by the corporation for a period of forty-eight months. 1 The principal facts are not in dispute, and the solution of the question depends upon the interpretation of various documents, in the light of the corporate situation existing at the time of their drafting and acceptance. In a long and thorough opinion in the court below, Judge Warnken made full findings of fact, which we accept as setting forth the situation accurately.

The case involves one of a series of options to purchase stock granted by the Glenn U. Martin Company to the appellant, Mr. J. Bradford Wharton, Jr. The corporate name of the appellee has been changed to The Martin Company, and we will refer to it in this opinion as either “Martin” or “the Company,” and to Mr. Wharton as “Wharton.” In 1951 the Company was in financial straits, and it was the opinion of all concerned that new management was required in order to rehabilitate its financial structure and to save the Company from bankruptcy. Under the chairmanship of Mr. Howard Bruce, who was both a director and a stockholder, it was determined to invite Mr. George Bunker, to whom we will refer as “Bunker,” to be president, and Wharton to be “vice president—finance” in order to take control of the management. Both Bunker and Wharton had been associated in the operation of the Trailmobile Company, which under them had been successful; and it was necessary to offer substantial inducements to both in order to obtain their acceptance of positions at the Martin Company. Bunker was offered a salary of $75,000. a year and a series of options to purchase 70,000 shares of common stock; Wharton was offered a salary of $45,000. and a series of options to purchase 25,000 shares of common stock.

The salaries were the same as those which Bunker and Wharton had been receiving from the Trailmobile Company. In each case the time of exercise of the options was spread over a period of five years. The ¹⁸⁰ option in the case at bar was not exercisable until Wharton had been employed for forty-eight months by the Martin Company. • Bunker and Wharton assumed their duties at the Company as of February 21, 1952. Under their management the Company prospered; a net loss of $22,178,434 suffered in 1951 was changed into a profit of $5,808,312 for 1952; and by 1954 the Company books showed a profit of $20,052,315.

Bunker was both president and director from the beginning. Wharton was elected as a director on May 15, 1953, in addition to his office as vice president—finance. On May 16, 1952, i.e., shortly after Wharton was elected vice president—finance, the board of directors by resolution fixed their compensation at $100. per meeting. This amount was increased on June 22, 1953, to $250. per meeting.

On June 2, 1954, in a proxy statement the stockholders were informed that a proposed charter amendment would authorize “reasonable compensation” to the directors, and that the management intended to recommend a payment of $5,000. per annum “to each director who is not otherwise regularly compensated by the Company.” The amendment was adopted by the stockholders on June 28, 1954. On July 26, 1954, the board of directors passed the following resolution: “RESOLVED, that * * * Directors not otherwise compensated by the Corporation be paid for their services as members of the Board at the annual rate of $5,000 payable in semi-monthly installments. “RESOLVED FURTHER, that the members of the Board of Directors whose compensation is fixed by this Resolution shall be deemed to be employees for the purposes of this Resolution and shall be eligible for and entitled to those rights and benefits of salaried employees of the Glenn L. Martin Company to participate in its Group Insurance program, but they shall not participate in its Pension program.” Wharton was at this time vice president-—finance, and director. Bunker testified that the object of changing the di ¹⁸¹ rectors from a fee basis to a salary basis was to obtain a sort of “contractual commitment” from each of the directors, which would increase their sense of responsibility to the Company and their interest in its affairs. On December 24, 1954, Wharton suffered a severe illness, and in May, 1955, it appeared that he would be incapacitated for another six months.

He then advised Bunker that he did not intend to resume his duties as vice president—finance after recovering from his illness, but that he intended to continue as a director of the Company. On June 3, 1955, the board of directors treated a letter written by Wharton on June 1, 1955, as his resignation, and accepted it. Wharton thereafter continued as a director only until December 20, 1956, when he resigned. Wharton’s service as an officer was thus for approximately thirty-nine months, from February 21, 1952, until June 3, 1955.

As both officer and director he served for approximately twenty-four months, from May 15, 1953, until June 3, 1955. After his resignation as vice-president—finance, he served as director only for approximately eighteen months, from June 3, 1955, until December 20, 1956. The total time of his service both as officer and as director was approximately fifty-seven months, from February 21, 1952, until December 20, 1956. While he was vice president—finance, Wharton devoted substantially his full time to the affairs of the Company as an active officer.

After June 3, 1955, he acted as a director only, and in that capacity he attended nine directors’ meetings. On December 4, 1956, the day before his resignation as director, Wharton attempted to exercise his option, but the Company instructed the option agent not to issue the stock, on the ground that Wharton did not qualify under Par. 4 of his option, since he had not been “employed” by the Company for forty-eight months. The position of the Company was that after his resignation as vice-president—finance, and while he was merely a director, Wharton was not “employed ” As a consequence, this suit was brought to compel the issuance of the stock covered ¹⁸² by the option, which, through stock dividends, now amounts to 6,063% shares. No criticism is made of Wharton’s work for the Company or of his conduct either as officer or director.

The causes of his resignation were differences of opinion between him and Bunker as to corporate policies, and the desire of Wharton to be the head, rather than second in command, of a company. The decision of this case turns upon the construction of certain documents. No definition of the vital words “employed,” “employee,” and “employment” are contained in them. All of the documents were drawn by skilled attorneys and approved by the persons concerned, who were familiar with options and the tax laws affecting them.

The option herein concerned was dated June 30, 1952, and as stated above was originally for 5,000 shares of stock, at $9.75 per share. It was not assignable or transferable during Wharton’s lifetime. It was the third of a series of similar options totaling 25,000 shares, two of which had previously been exercised by which Wharton had acquired 15,000 shares. The options differed only in their requirements as to the period during which the holder should have been employed by the Company prior to their exercise. 2 The vital words in the option here concerned are those quoted above which required the holder to be “employed” for forty-eight months.

An addition to the option is a letter written by the stock option committee to Wharton and accepted by him on September 23, 1952, containing the following provision which had inadvertently been omitted from the option itself: “(b) * * * you shall in no event have the right to exercise the options during your respective lifetimes at any period beyond three months after your respective employment with the company ceases.” Prior to the issuance of the option, a Stock Option Plan, dated February 21, 1952, had been prepared by the stock option committee and approved by Wharton. It contained the following language: ¹⁸³ “2. This Stock Option Plan shall be administered by a Stock Option Committee composed of the President * * * and not less than two Directors who are not officers or employees of the Company * * “3. The Stock Option Committee may * * * authorize the granting to Officers (including Officers who are members of the Board of Directors) and key employees * * * of options * * *.” In order to obtain the approval of the plan by the stockholders, a Proxy Statement for the meeting of April 2, 1952, was issued, in which it was stated that the Stock Option Committee was to be composed of “* * * the President of the Company and not less than two other directors who are not officers or employees of the Company * * The Proxy Statement contained also the following statement : “* * * under the Plan all officers of the Company, including those who are directors, would be eligible to participate; directors who are not officers or employees of the Company would not be eligible to participate.” We thus find the three words “employed,” “employment,” and “employee” used in these papers, and it does not appear from the record that there was any contemporaneous discussion of the meaning of any of these words, or of the word “participate.” A director occupies a special status, which has some aspects in common with that of ordinary workers variously called agents, servants and employees, and some aspects in common with the corporate officers.

As Mr. Machen says (Corporations, Sec. 1399): “The truth is that the status of director and corporation is a distinct legal relationship. It resembles in some respects those of agent and principal, of ¹⁸⁴ managing and dormant partners, of trustee and cestui que trust; but it is different from each.” and also (at footnote 3): “Although directors are agents yet they are not servants or employees, and a director cannot be deemed a person in the employment of the company.” The Maryland cases support these statements. Judge Offutt, in Shriver v. Carlin & Fulton Co., 155 Md. 51, 58 , said that “* * * [neither] a director nor any other officer of a corporation is by virtue of his office its employee, * $ % ” Judge Markell, in Warren v. Fitzgerald, 189 Md. 476, 488 , said that “[T]he individual directors making up the Board are not mere employees * * A director may be an employee of his company, if under the facts of any given case he fits the definition of an employee. In Santa Clara Mining Association v. Meredith, 49 Md. 389, 400 , Judge Richard Grason said that “[I]fa*** director of a corporation renders services to his corporation which are not within the scope of, and are not required of him by, his duties as president, or director, but are such as are properly to be performed by an agent, broker or attorney, he may recover compensation for such services upon an implied promise.” In Sun Cab Co. v. Powell, 196 Md. 572 , this Court considered the definition of “employer” under the Maryland Workmen’s Compensation Act.

Judge Delaplaine laid down four tests for the question of whether a person was an employer, namely whether the person concerned had the powers (1) of selection and engagement of the servant; (2) the payment of wages; (3) the power of dismissal; and (4) the power of control over the servant’s conduct. Judge Chesnut in Yellow Cab Company v. Magruder, 49 ¹⁸⁵ F. S. 605, 607, with reference to the question of whether the status of employer and employee existed, said that the test is “* * * whether the alleged master in any case has the right, even if he does not exercise it, to control and direct the alleged servant, not only as to what shall be done but how it shall be done.” Thus a director is neither per se an employee, nor a mere employee. Whether a director is or is not an employee depends upon the nature of his duties. For other statements as to the status of directors, see Warren v. Fitzgerald, 189 Md. 476 and Restatement of Agency (2d), sec. 14 C. A director is elected by the stockholders, and his duties ordinarily consist in attending meetings, exercising his judgment on propositions brought before the board, and voting.

He has no power to issue orders to any officer or employee, nor can he institute policies by himself, or command or veto any other action by the board. Ordinarily, a director is not subject to dismissal by the board or by any officer thereof, nor can he hire or discharge any employee. Nor can he be discharged by the officers, his fellow directors, by any stockholder or any employee or agent of the Company. He can be removed only through action by the stockholders.

Directors are sometimes paid and sometimes not paid. The directors of this Company were paid on three separate bases, as set forth above, two of which were by fees for attendance at meetings, and the third was by annual salaries. Neither the fact that they received money, nor the amount of money received, nor the fact that this remuneration was on a fee per meeting basis, or on an annual salary basis, seems to have made any change in their duties. The record in the present case indicates clearly that while Wharton was vice president—finance, he gave substantially his full time to the duties of that office, exercising managerial and executive duties, presumably under the direction of the president and the board of directors.

When the system of remuneration was changed from a fee ¹⁸⁶ basis per meeting to an annual basis, it is clear that although Bunker wanted to increase the sense of duty and responsibility of the directors there was no change whatever in the