Employee Share Incentives Update: What Happens to Share Awards When Employees Leave?
05 April 2017
There is a growing trend amongst employers towards rewarding key employees with share-based remuneration in place of cash bonuses. Issues can arise when a worker in receipt of these benefits leaves and employers need to consider how to deal with the employee’s share awards or share options. We examine these issues and explore the importance of including Micklefield Clauses in equity incentive plan documents.
Equity Incentive Plans ("EIP"s) often provide that, where an individual’s employment is terminated, the unvested shares or share options are lost. These plans will contain a 'Micklefield Clause' which protects the company from any liability arising as a result of loss of an employee’s unvested shares or options caused by the termination of the employment.
Those operating the EIP typically have a discretion under the plan documentation to allow an award or part of an award be retained by the departing employee. The nature of the termination will affect whether the employee will be entitled to keep or realise those benefits.
Good leaver v bad leaver
Good leavers - If employees leave due to redundancy, illness or retirement, they may benefit from partial or accelerated vesting of their awards.
Bad leavers - If employees are dismissed or resign, they may lose all their options including those which have been vested.
Disputes can arise where an employee is dismissed and, facing the loss of significant future remuneration, brings a claim against the company.
The Micklefield clause
The UK case of Micklefield v SAC Technology Ltd established the principle that, even if an employee’s dismissal is wrongful, the employee may still lose his or her right to exercise their options on termination, if the scheme provides for this.
In Micklefield, the share option scheme stated that:
- options would lapse if the employee ceased to be employed for ‘whatever reason whatsoever’; and
- the employee would cease to be entitled to recover any compensation for loss of rights under the scheme in the event of termination ‘for any reason’ (a "Micklefield Clause").
After Mr Micklefield was dismissed, the UK High Court held that these rules were enforceable and that he was not entitled to recover damages for being unable to exercise his options as a result of his dismissal.
This case has not yet been considered from an Irish perspective but it is likely that the Irish courts will follow this approach.
It is important to note that the dismissal in this case was a wrongful dismissal rather than an unfair dismissal. A wrongful dismissal is one in which the employer is in breach of the conditions of the contract of employment. In Micklefield it amounted to a failure to give proper notice. An unfair dismissal, on the other hand, is one in which the employer fails to follow fair procedures and/or establish a fair reason for dismissing an employee.
Employees in Ireland have significant legislative rights to claim an unfair dismissal. Employees can only waive these rights through a severance agreement reached with the benefit of independent legal advice.
As a result, a Micklefield Clause in EIP documentation will not protect employers in successful unfair dismissal claims from paying compensation for the loss suffered.
In Ireland, generally the maximum award of compensation in cases of unfair dismissal is 104 weeks’ (two years’) remuneration. The scope of what constitutes remuneration is quite wide. The EAT held in Bunyan v UDT (Ireland) Ltd that anything that is a reward for services is remuneration.
They also held, however, that benefits which are a “consequence of the exercise of a discretion in the claimant’s favour” are not considered remuneration for the purposes of determining compensation. Whether share options or awards will be considered remuneration will come down to the particular circumstances of the case.
Claims for breach of contract through improper exercise of discretion
Companies typically have a discretion to allow equity incentive awards be retained despite termination of employment. This gives employees an option to claim damages for breach of contract where there is an improper exercise or non-exercise of this discretion. There are no limits on the level of compensation that may be awarded for breach of contract.
In these circumstances, as the claim comes under a contract, a Micklefield Clause may not protect employers as the loss suffered arises out of the improper use of the discretion and not the termination.
Irish employers should always include an appropriate Micklefield Clause in equity incentive plan documents.
It may not protect employers from claims of unfair dismissal or breach of contract but it may protect them from wrongful dismissal or other claims where a disgruntled employee loses their share rights on termination. At the very least, this type of clause strengthens the position of an employer in settlement discussions if a dispute does arise.
For more information, please contact a member of our Employee Share Incentives team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.