One of the problems that companies, whether large or small, face is how to incentivize and retain good staff. There are several types of employee incentive plans. However, a very common one is to grant stock and/or stock options to an employee.
The assumption on which the employee receives the stock options and/or shares is that they add direct value through their work efforts. This is fine as long as everything works fine, but what happens in the event that the employee ceases to be an employee of the company, either voluntarily or involuntarily.
In essence, the employee has received his stock/stock options in recognition of his efforts, whether past or present, and also in anticipation of future efforts. What options does the employer have in case the employee leaves the company?
Where employee stock options have been granted but not exercised, the rules of the plan or option agreement, as well as the employee’s employment contract, must provide that the stock option will terminate upon termination of employment. They must also state that the employee agrees that he will not contest and/or bring any claim in connection with the stock option agreement.
The situation is somewhat more complicated when the shares are awarded to the employee, either as a result of the exercise of the stock option, or otherwise. If an employer has been astute, he will ensure that the employee/shareholder is also a party to a shareholders’ agreement when awarding the shares.
A shareholders’ agreement under English law governs the rights and obligations of shareholders. It works in conjunction with the company bylaws. Clearly, when the employee has received the shares from him in anticipation of his future endeavors, an employer may not want the employee to retain the shares from him in the event the employee leaves the company. An employer may implement such a policy by including “Quit” provisions in the shareholders’ agreement and also in the employee’s employment contract.
Next, the company must consider whether, in certain circumstances, the departing employee should receive only nominal consideration (as opposed to market value) for the value of the shares at the time of transfer; this is usually referred to as a “Bad Leaver”. Bad Leaver provisions tend to relate to circumstances where the employee has been forced to leave as a result of misconduct or breach of the shareholders’ agreement or employment contract. Furthermore, Bad Leaver can also be applicable when the employee has not fulfilled certain conditions after receiving the shares, such as staying with the company for a defined period of time. In such circumstances, the employee is forced to transfer the shares to the company and/or existing shareholders at par value, upon departure.
Conversely, if the employee leaves the company voluntarily and/or on good terms, then, in such circumstances, the leaving employee may be considered a “good leaver.” In such circumstances, the shareholders’ agreement and employment contract must include relevant provisions requiring the employee to transfer his or her shares to the company or existing shareholders at fair/market value or at a discount from fair/market value, provided that is equivalent. equal to or greater than the nominal value.
Including Leaver provisions provides the assurance that in the event an employee leaves the company, they will not retain their shares and therefore benefit from the future efforts of the remaining employees. It is a very important provision to include in any shareholder agreement and employment contract.
