How to make sure that you keep your stock options and shares when your employment terminates

When your employment is coming to an end, you need to make sure you understand what will happen to any share options and awards you hold. If you are leaving with a settlement agreement, it is important that the agreement sets out details of the options and awards you hold and explains what will happen to them following the termination of your employment, and in particular that any required exercises of discretion to deviate from the usual plan rules, or to provide for Good Leaver status for example, are confirmed in the settlement agreement or related documentation as having been duly performed. A recent High Court decision in Dixon v GlobalData PLC demonstrates some of the pitfalls in this area.

Dixon v GlobalData PLC: What can happen as your employment terminates?

Mr Dixon was employed by Canadean Limited which was bought by GlobalData PLC in 2010. In 2011, Mr Dixon was granted share options in the GlobalData’s unapproved employee share option plan. In September 2014, his line manager informed him that he was being let go. He was given a draft settlement agreement by his employer which made no reference to his share options. However, after complaining about the way he had been treated, he agreed with GlobalData’s CEO that he would remain in post until the end of December (rather than the end of September as originally planned) and abide by various post-termination restrictions, including not working for any competitors for four months after the end of his employment. The CEO also assured him that his share options would remain in place and would “vest in line with current conditions”. The settlement agreement was amended to reflect this.

Mr Dixon understood that he could keep his options after his employment ended and that provided GlobalData’s performance targets were met, the options would vest and he would be able to exercise them just like everyone else who was still employed. However, when he tried to exercise his options in 2020 and 2022, GlobalData refused to let him and claimed they had lapsed on termination of employment.

Under GlobalData’s share plan rules, share options ceased to be exercisable once an employee had been given notice of termination. However, it had discretion to extend the period in which they could be exercised. Mr Dixon argued that the CEO’s assurances showed that GlobalData had exercised this discretion and he therefore remained entitled to exercise his options.

The High Court disagreed, finding that the discretion had not been exercised. It noted the unchallenged evidence that this discretion had to be exercised by the remuneration committee or the full board of GlobalData and this had not happened in Mr Dixon’s case. However, it went on to find that as Mr Dixon had received assurances that his options would continue to be exercisable after termination on the same basis as if he had remained employed and he had reasonably relied on those assurances to his detriment, it was unconscionable for GlobalData to seek to resile from the assurances the CEO had given. He was therefore entitled to a remedy in proprietary estoppel, an equitable remedy which essentially enables a claimant to enforce an unkept promise.

The High Court rejected GlobalData’s argument that Mr Dixon’s claim was precluded by a term in the share plan which precluded claims for compensation on termination of employment for the loss of any right or benefit under the plan. The Court ruled that this precluded claims where the loss flowed from the employee ceasing to be employed. It was not intended to preclude claims based on assurances that Mr Dixon’s rights would continue, or from claims that rights had been acquired through estoppel.

The question of remedy will be decided at a separate remedies hearing.

Lessons for employees from Dixon v GlobalData PLC

Although Mr Dixon was ultimately successful in this case, this was due to the precise facts of the case. Not many employees would be able to make out all the elements of a claim for proprietary estoppel, or wish to incur the legal costs of doing so. It has been reported that Mr Dixon’s share options may have been worth in the region of £800,000.

Good leaver vs bad leaver

If you hold share option or awards, you need to understand what will happen to them when your employment terminates. This will depend on a number of factors, including the reason why your employment is ending, as well as the share plan rules and the terms of any awards. If you have resigned or you have been dismissed you might be regarded as a bad leaver and your awards and options will likely lapse, unless there is an exercise of discretion by the business otherwise. However, if you are being made redundant, retiring or your employment is terminating due to ill-health or disability you might be regarded as a good leaver and you may be able to retain the benefits of your options and awards (subject to tax treatment rules for awards on termination of employment).

Take care with settlement agreements

If you are leaving with a settlement agreement, you will be waiving all claims arising from or connected with your employment and its termination. Importantly, this waiver could be wide enough to include a waiver of claims relating to share options and awards, even if such claims are not waived expressly. It is therefore important that the settlement agreement clearly sets out details of the options and awards you hold and how they will be dealt with. If there is a discretion to be exercised, you will want to seek to ensure that the discretion has been properly exercised in accordance with the plan rules and that this is documented.

Where the share plan is a group scheme operated by a group company other than the employer, consideration should be given to joining the group company as a party to the settlement agreement. Failing that, as a minimum you will want to try to obtain evidence that the group company has properly exercised its discretion in accordance with the plan rules.