Employee Share Schemes – ‘Golden Handcuff’ or Reward for Past Services?

This is our second article in our series of articles on Employee Share Scheme (“ESS”).

The characterisation of ESS has affected whether benefits under option schemes should proportionately reflect the period of employment during the operation of scheme.

The case of Canizales v Microsoft Corporation (2000) 99 IR 426 (‘Canizales’) involved a Microsoft executive from the United States who was invited to take up a position in Sydney to develop and work with the ‘ninemsn’ joint venture between Microsoft and Publishing and Broadcasting Ltd. Despite his contract only providing for one month’s notice of termination, Mr. Canizales was assured that he would hold the position for at least two years, long enough for $14 million of Microsoft share options to vest. He was dismissed two months before the end of the waiting period before vesting following a dispute with his directors. Mr. Canizales applied to the NSW Industrial Relations Commission for relief under the unfair contracts provisions of the New South Wales Industrial Relations Act 1996.

Canizales involved two share option plans: the first being the ‘regular grants scheme’ whereby one-eighth of the options granted were vested at 12 months after the grant date and continued to vest every six months thereafter. The last two one-eighth portions did not vest because of the termination of employment. Microsoft changed the operation of its stock option scheme with the objective of retaining senior executives and rewarding them for their loyalty as they were being head hunted by competitors. The ‘jumbo grants scheme’ was then created. A clause in the contract stipulated that the employee could only exercise share options that had been already vested prior to the date of termination and the severance package required them to be exercised six months within termination. Accordingly, there was no provision for any benefit on redundancy. In Canizales, the claim was not for the outstanding balance of unvested options, but the Jumbo grant and regular grants vested prior to cessation of employment.

Peterson J questioned the character and purpose of the schemes to determine whether the grants of options were to reward past service or to constitute ‘an essential part of the ongoing remuneration’ and whether they were forward or backward looking. Peterson J found that given the objective of the regular scheme was stated as to “attract and retain the best available personnel” this comprised a reward for joining Microsoft, whereas the jumbo grants offer was to serve as a retention tool. The longer wait period for vesting was to encourage employees to stay and contribute to Microsoft’s success.

Peterson J held that the employee had acted on an assurance that he would be employed for at least two years, and allowed him those options that he would have obtained if he had been employed for that two-year period. The NSW Industrial Relations Commission was willing in this case to utilise its statutory power to vary an unfair contract. Peterson J extended the notice period to two months, allowing Mr. Canizales to exercise the share options.

Hot Tip for Employers!

Given the result in Canizales, it is clear that employers need to be aware of the purposes for which ESOS are created; the statements and representations made to employees; and ESOS in the context of severance packages.

If you are either an employee who has questions about ESS or an employer considering an employee share scheme as part of the remuneration package, feel free to contact us for a free consultation on (02) 9262 5495 or (03) 8899 7870, or visit our website at www.mclp.com.au or like our Facebook Page at http://goo.gl/Jx2hdO.

This article is not legal advice and should not be relied upon as legal advice. All articles found on this website are intended to provide informative information, nevertheless, in many instances legislation and case law has been simplified and/or paraphrased. If you would like personal legal advice based on your current circumstances, you should contact MurdockCheng Legal Practice for a free consultation.