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.
Share options can be the single most financially important aspect of a severance package or ex gratia payment, as they are becoming a more popular incentive for employers to use with their employees than cash-based bonuses.
What is a share option?
A share option is the option given by an employer to an employee to purchase shares in the company at a fixed price, or at a discount set by the employer. This is offered as an incentive because it allows you to purchase shares at a tempting price, and to share in the success of the company if the value of the shares increases. But normally these share options only ‘vest’ after you have been employed for a number of years. Vesting means that you can actually ‘exercise’ the share options by buying the shares at the agreed price. If the value of the company has increased since you’ve been employed, then the price at which you can buy them for will be lower than their market value. This means that you can sell them and make a tidy profit.
Share options can be the single most financially important aspect of a severance package or ex gratia payment, as they are becoming a more popular incentive for employers to use with their employees than cash-based bonuses. They keep employees in their jobs for years, waiting for their share options to vest, so that they can cash in on the increased value.
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 an 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’?
When drafting an agreement and deciding on the inclusion/exclusion of share options, the first thing that will be considered is how your employment ended and also whether you are classified as a ‘good leaver’ or a ‘bad leaver’.
Good leavers: examples include: disability, ill-health, retirement and redundancy (redundancy could also be classified as bad 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. This is complicated stuff, which even a lot of employment lawyers don’t fully understand.
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.
Top 3 Tips
- When leaving employment ensure you understand the impact on your share options
- Try to ensure that you have good leaver status upon leaving
- If you are a bad leaver then consider whether the reason for your dismissal is genuine
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.
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 under certain circumstances and retract your share options. An example of when an employer could retract your share options is that of post termination restrictive covenants (see 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 and you would be well advised to consult a specialist if you found yourself in these circumstances.
Claiming your share options if you have less than 2 years’ service
If you have less than 2 years’ service when you are dismissed then you can’t claim for unfair dismissal – so how could you negotiate any value for your unvested share options? Well, it may be possible to say that you were incorrectly labelled as a bad leaver. You would also need to put forward the argument that there is an implied term in the share contract that you would not be incorrectly labelled as such.
Then you would need to show how your labelling was actually incorrect. For example if redundancy is classified as bad leaver, then you would be trying to show that you were not genuinely made redundant, but in fact you were deliberately singled out for dismissal in order for your employer to avoid paying you for the value of your share options. Again, very legally complicated stuff.