Share Options as Part of a Settlement Agreement
If you are a senior employee of a company, you may have been offered share options as part of a benefits package outlined in your contract either when you began your employment, or during your work at the company. If you are exiting the business it is important to ensure these benefits are addressed as part of any settlement agreement. The settlement agreement (previously known as a compromise agreement) is a legally binding contract between an employee and an employer that is signed when the employment ends. Not all leavers of employment will receive a settlement agreement, but if you do it’s important to make sure that the terms are as beneficial for you as possible, which is where we come in with this free advice, or via legal representation.
Share options can be the single most financially important aspect of a severance package, settlement agreement or ex gratia payment, as they are becoming a more popular incentive for employers to use with their employees than cash-based bonuses.
What are share options and how do I know if I have them?
A share option is the option given by an employer to an employee to purchase shares in the said company at a stated fixed rate price, or at a discount set by the employer. This is offered as an incentive because it allows the employee to purchase shares at a tempting price, and to share in the success of the company if the value of the shares increases.
Conditions affecting the inclusion of share options in a settlement agreement
As is usual with employers, they have various conditions in place to protect themselves, and so as an employee you often have to work hard to actually get your hands on the benefits initially offered as part of your employment contract. Your employer will have a clearly laid out and thorough share plan. This will outline various conditions which you need to meet to be eligible to take advantage of any unvested shares either at the date of termination, or at a future date.
When drafting a settlement agreement and deciding on the inclusion/exclusion of share options, the first thing that will be considered by all is how your employment ended – also referred to whether you are classified as a ‘good leaver’ or a ‘bad leaver’.
Are you a ‘good leaver’ or a ‘bad leaver’?
Employees who leave employment tend to be classified as either a good leaver, or a bad leaver – this depends on the circumstances as to how their employment ended, some examples are below.
Redundancy (could also be classified as bad leaver)
Redundancy (could also be classified as good leaver)
Those classified as bad leavers may lose their rights to exercise their shares. This is where an employment solicitor’s experience can prove invaluable because negotiation by an employee’s solicitor with the employer will involve using the evidence to argue that the reason for the termination of your employment may have been unfair and so should not deprive you of the benefits that it’s outlined in the share plan that a ‘good leaver’ will receive.
Situations where there may be a dispute can arise if, for example, you have left employment due to constructive dismissal, or redundancy if the company did not follow the redundancy procedures adequately. In these situations the company may classify you as a ‘bad leaver’, but there are grounds to negotiate a settlement agreement and change your reason for termination to ensure you are a good leaver.
Vested and unvested share options
As well as your classification as a good or bad leaver having an impact on your ability to retain your share options, some policies and contracts also make a distinction between vested and unvested share options. Vested share options are those that you already have the right to exercise (i.e. you could already purchase the shares). Unvested share options are those you have been granted the right to exercise at some future date or upon fulfilment of a condition, which has not yet been met. Often, good leavers are entitled to exercise vested but not unvested options.
So can your employer take away your access to the share options?
Most employers cleverly integrate the right to override the provisions of the share scheme – this means that they could be covered to retract your share options under certain circumstances. Negotiating with the company and persuading them to offer discretion in your, the employee’s favour, is not always easy, but can be key to successfully achieving a healthy severance package.
An important area to mention is that of post termination restrictive covenants (Find out more about our article on restrictive covenants). If you sign a post termination restrictive covenant which you then breach, an employee previously described as a good leaver, could become a ‘bad leaver’ and therefore forfeit their rights to unvested shares. Previously, the courts have upheld restrictive covenant provisions of this kind and so it is something to bear in mind. We aim to arm employees with as much information as we can so that they can understand how to stand up for their rights, and are not taken advantage of by employers.
Claiming your share options in the case of unfair dismissal
If you are dismissed unfairly, you may be able to include the value of share options in your claim. This is a possibility even if the criteria and rules within the share plan say that you waive all such rights. This is because the value of the shares is something you have lost as a result of your unfair dismissal. This is a complex area of employment law. You will notice that some other law firms practice in multiple areas, but Monaco Solicitors specialise in the niche area of employment law and all the situations that this covers so we are perfectly placed to advise you on the best course of action.
- When leaving employment ensure you understand the impact on your share options
- Try to ensure that you have good leaver status upon leaving
- Be aware of cut off dates for exercising your options
Tax on settlement agreements
A related topic we consider when reviewing or negotiating settlement agreements for clients is the tax on the payment amount. It’s worth noting that having the correct wording in your settlement agreement is also very important to reduce the tax costs on the employee receiving a settlement payment. You can find more information on this within our detailed article on the subject.