Share options in severance packages

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 now exiting the business it is important to ensure these benefits are addressed, as part of any settlement, in your settlement agreement,

What is a share option?

A share option is an 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 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.

What are share plans?

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 as 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 a bad leaver)

Bad leavers: would be so-called for such circumstances as capability dismissal, misconduct dismissal, and resignation

Those classified as bad leavers may lose their rights to exercise their shares.

This is where a specialist employment solicitor’s experience can prove invaluable: negotiation by your solicitor with your employer will involve using the evidence to argue that the reason for the termination of your employment may have been unfair.

If it’s unfair, you should not be deprived of the benefits that the share plan says a ‘good leaver’ will receive. (This is complicated stuff, which even some 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 circumstances, 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.

What are 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 options, but not unvested options.

Can your employer remove your access to 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: 

If you sign a post-termination restrictive covenant which you then breach, and were previously described as a good leaver, you could become a bad leaver and therefore forfeit your 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 not be 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 with 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 a 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.)

 

Next steps

In addition to the articles highlighted throughout this article, you might like to have a look at our settlement agreement templates and particularly the one dealing with shares and a company car.

Generally, as this is such a complex area of employment law, we strongly advise you to seek the advice of an experienced employment solicitor with specialist knowledge of shares in settlement agreements.

We at Monaco Solicitors are pleased to have such experts amongst our team of senior employment lawyers and would be happy to help. Get in touch:

• Via this website link
• By phone on 020 7717 5259
• By email: communications@monacosolicitors.co.uk.