One of the issues facing companies whether large or small is how to incentivise and retain good staff. There are various types of employee incentive schemes. However a very common one is either to grant share options and/ or shares to an employee.
The assumption upon which the employee is receiving the share options and/ or shares is that they add direct value through their employment endeavours. This is fine while everything is working well but what happens in the event that the employee ceases to be an employee of the company whether voluntarily or involuntarily.
In essence the employee has received his share options/shares in recognition of his endeavours whether past or present and also in anticipation of future endeavours. What options are available to the employer in the event that the employee leaves the company?
Where employee share options have been granted but have not been exercised, the scheme rules or option agreement as well as the employee’s employment contract should state that the share option shall terminate upon ceasing to be an employee. They should also state that the employee agrees that he shall not challenge and/ or pursue any claim in relation to the share option arrangement.
The position is somewhat more complicated where shares vest in the employee whether as a consequence of the exercise of the share option, or otherwise. If an employer has been shrewd it will ensure that the employee/ shareholder is also a party to a shareholders agreement upon vesting of the shares.
A shareholders agreement under English Law regulates the rights and obligations of the shareholders. It works in conjunction with the Articles of Association of the company. Clearly where the employee has received his shares in anticipation of his future endeavours then an employer may not wish the employee to retain his shares in the event of the employee departing the company. An employer can implement such a policy by including “Leaver” provisions in the shareholders agreement and also in the employee’s contract of employment.
The company then needs to consider whether in certain circumstances the departing employee should only receive nominal consideration (as opposed to market value) for the value of the shares upon transfer – this is generally termed “Bad Leaver”. Bad Leaver provisions tend to relate to circumstances where the employee has been forced to leave as a consequence of misconduct or breaching the shareholders agreement or employment contract. In addition Bad Leaver may also be applicable where the employee has not satisfied certain conditions after receiving the shares such as remaining with the company for a defined period of time. In such circumstances the employee is forced to transfer the shares back to the company and/ or existing shareholders at nominal value, upon departure.
Conversely if the employee leaves the company voluntarily and/ or on good terms then in such circumstances the departing employee might be regarded as a “Good Leaver”. In such circumstances the shareholders agreement and employment contract should include relevant provisions such that the employee is forced to transfer his shares back to the company or existing shareholders at either market/ fair value or at a discount to market/ fair value, providing this is equivalent to or above nominal value.
Including Leaver provisions provides security that in the event an employee leaves the company then he shall not retain his shares and therefore benefit from the future endeavours of the remaining employees. It’s a very important provision to include in any shareholders agreement and employment contract.