Employee Share Schemes – What Proportion should be Available on Cessation of Employment?
This is our third article in our series of articles on Employee Share Scheme (“ESS”).
Where employees have participated in an ESS and have had their contract of employment terminated prior to the vesting of the grants, what portion of the grants should be made available to employees upon cessation of their employment? Case law has developed in regard to the approach taken by the courts. It has generally been found that inadequate benefits in relation to ESS were available under the contract on its termination where the termination was for causes beyond the employee’s control.
In GIO Australia Ltd v O’Donnell (1996) 70 IR 1 (“GIO”) and Westfield Ltd v Helprin (1997) 82 IR 411 (“Helprin”), the successful applicants were awarded share options in the same proportion as the completed service of the option qualifying period. In both cases, while the adequacy of performance of the employee was in contention, there were no findings of misconduct or inadequacy in the performance of duties.
In GIO Hill, Hungerford and Marks JJ decided that the share option plan, and thus the contract of employment, were unfair as it drew no distinction between various types of cessation of employment and the reasons therefor. The remedy was to remedy the plan so as to enable the exercise of the options within 12 months (rather than the two year period of the contract and that which was awarded by the Trial Judge).
In Helprin, the option scheme was similarly deemed to be unfair in not making provision for Mr Helprin to receive some benefit under the option scheme upon termination of his employment (Mr Helprin had served three-quarters (73%) of the time that he was required to be employed before the options could be exercised). Accordingly, the court varied the options plan so that Mr Helprin was entitled to exercise 73% of the options granted to him under the scheme, proportionately reflecting his period of employment during the operation of the scheme.
In Westfield Holdings v Adams (2001) 114 IR 241 (“Adams”), the employee was unaware that share options under the Executive Incentive Scheme were ‘hand-cuffed’ for a period of five years and which lapsed in the event of a redundancy. The Directors of the company allowed the employee to exercise 30 percent of the options, whilst he had worked 63 percent of the five-year qualifying period.
A fundamental aspect of the employee’s case consisted of the claim that he was misled by Westfield when entering into the contract by Westfield’s misrepresentation of the share option scheme in omitting to inform him of the 5-year wait period before vesting. Critically in Adams, the Industrial Relations Committee considered on appeal that the employee’s failure to take reasonable steps to inform himself of the conditions attached to the share option scheme were a significant factor in determining the case. Given the employee’s previous participation in share option schemes, the employee was commercially sophisticated and therefore the court did not accept that he had been misled.
Hungerford J stated in the trial judgment Adams v Westfield Holdings Ltd (2000) 99 IR 382 (“Adams”) that where the employment ended in situations beyond the employee’s control such as redundancy, death, illness or disability; “more favourable treatment than an approach merely equating the entitlement to options in the same proportion as the completed service of the option qualifying period” should be given. However, this did not apply in this case.
The Commission cited A & M Thompson Pty Limited v Total Australia Ltd  2 NSWLR 1 to illustrate that the comparative bargaining positions of parties to a contract and their capability to appreciate the contractual terms accepted therein affected the assessment of the fairness of a contract and thus the share option scheme. As a consequence of the employee not taking reasonable steps to inform himself of the scheme, his entitlement to the options was awarded on the ‘proportionality’ approach (i.e. in the same proportion as the completed service of the option qualifying period). The Trial Judge provided in the first instance the full benefit of share options that he would have received for the full five-year qualifying period.
Wright P, Walton VP and Boland J distinguished Adams on the facts from Canizales and GIO where more than the proportional amount was awarded.
Where an employee has resigned, and unvested options have lapsed, s/he will be unable to vary ESOS for unfairness: Bell & Anor v Macquarie Bank Ltd & Anor (2002) 117 IR 281.
Hot Tip for Employees
It is clear from Adams that employees should make investigations and seek additional information where necessary, including requesting a copy of the Incentive Scheme, as their conduct in this regard will be considered.
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.