Share Incentives – What happens if someone leaves?

If you are looking to implement a share scheme for your key employees you should consider whether the employees can take the shares with them if they leave. If you conclude that the shares should be transferred if they go, either to you, all the shareholders, or back to the company, you will need to decide what price should be paid for those shares and whether you want to include a distinction between good and bad leavers.

If the employee share scheme is structured as an option to acquire shares at a future date it would be typical to include a provision in the option agreement that results in share options lapsing immediately if an employee option holder were to leave the business. This means they do not become shareholders and the options will simply fall away.

If there is no option period (so the shares are to be acquired immediately), or if the options have vested (meaning the option holder has the right to acquire the shares and exercise the option) then things won’t be quite as simple if an employee were to leave. As they would then be shareholders (once the option has been exercised) you may want a legal basis upon which you could have the shares returned.

You may be happy for the employees to keep their shares (along with the benefits that go with this such as dividends) particularly, for example, if the shares were given to the employee in lieu of a market salary. Either way you may want to include a mechanism that gives you/the company the option to acquire them if they leave, with good/bad leaver provisions then determining the price to be paid for that employee’s shares.

Good leavers would typically be paid the “fair value” for their shares (as determined by a firm of accountants for example). This would allow a reasonable return to be paid to the employee for their services, but with conditions that must be satisfied in order for this to happen. It is, though, key to keep such provisions as simple as possible to avoid any ambiguity. One way of determining if an employee is a good leaver could be by reference to what constitutes a “bad leaver”. A bad leaver could be defined as an employee who leaves within a certain period of time after becoming a shareholder, is dismissed for reasons of gross misconduct, or breaches any post-termination restrictions in their contract of employment or service contract. By definition, a good leaver could then be anyone who is not a bad leaver. As an example a bad leaver could then be paid only a nominal sum or the amount they paid for the shares.

You should make sure that this is all thought through before the share scheme is adopted by the company. Retrospectively adding such provisions could cause problems. If you have an EMI Option Scheme any such restrictions on the shares must be referenced in the option agreement at the time of option grant. Adding them after the event could result in any tax advantages being lost. More generally any changes to the constitution of the company must be for the benefit of the company as a whole, and, if any minority shareholders (such as employee shareholders) are disadvantaged, they could challenge the insertion of such provisions through an unfair prejudice claim. If the shareholder were to be successful you/the company could be required to purchase their shares at fair value.

There is no right or wrong answer when it comes to such provisions but care should be taken to ensure that whatever is written into the constitution of the company (whether through its Articles of Association or Shareholders’ Agreement) is fair and motivational for the team.

For further information on  please do not hesitate to contact an Everyman Legal Solicitor on 01993 893620 or email