Share options on termination
What is the position of share options on termination?
Share options are often part of an incentive package for senior employees. A share option is the right to buy a certain amount of your employer’s shares at a fixed price at a point in the future, regardless of the future market price. There is a “vesting period” during which you will be unable to exercise the options, but you can do so once the once they have “vested”.
Employers often introduce conditions into their share plans in order for you to be eligible to unvested shares at the time of termination or at a later time. Such conditions usually take the form of whether you are classed as a “good” or a “bad leaver”. Good leavers are generally those who leave for reasons such as redundancy, retirement or ill health, whereas bad leavers are those who resign after a short period of time or are dismissed for capability or misconduct reasons. Not surprisingly, it is the bad leavers who may lose the option to exercise their shares, whereas the good leavers retain their rights.
A good leaver status can also be extended to include post termination restrictive covenants where, for example, you have agreed not to join a competitor for a period of time after your departure (usually 6 months). The courts have upheld provisions where such covenants have been breached in a settlement agreement and employees have subsequently become “bad leavers” and forfeited all rights to unvested shares.
In some cases, a bonus payment due to be awarded after you have left is also linked to a good leaver and bad leaver status. This is again often done by making the bonus payment conditional on your adhering to your post termination restrictive covenants. By doing this, your employer will be hoping you are not tempted to breach the covenants within the agreed period after you have left, as this would put payment of your bonus at risk.
It is worth checking the good and bad leaver provisions in your share plan at an early stage and ensure the settlement agreement reflects the correct status when you leave. You may have to argue that the label put on the reason for your leaving is unfair (such as for poor performance) and this should therefore not deprive you of good leaver status.