Employee equity arrangements often have ‘bad leaver’ provisions determining what happens to shares/options when employees leave. These provisions serve as a useful incentive to retain employees within the business and discourage the resignation of key employees. In Nosworthy v Instinctif Partners the Employment Appeal Tribunal (EAT) considered some novel arguments by an aggrieved ex-employee about the enforceability of such provisions.
Instinctif Partners (IP) acquired Ms Nosworthy’s former employer. She received shares in that company which she had to sell to IP under a share purchase agreement. Part of the payment for her shares was deferred and was subject to leaver provisions under which IP would be entitled to acquire a bad leaver’s shares for nil value. ‘Bad leaver’ included employees who resign.
Ms Nosworthy resigned and thus gained no benefit from her shares. She brought an employment tribunal claim for breach of contract and unauthorised deductions from wages. Her claim included unusual challenges to the enforceability of the leaver provisions, arguing the arrangements were an unconscionable bargain and/or an unlawful penalty. The employment tribunal found against Ms Nosworthy, who appealed to the EAT.
The EAT found in favour of IP, noting:
the leaver provisions related to Ms Nosworthy as a seller of shares. Payments that do not relate to individuals as workers are not covered by deductions claims so the context of these provisions should always be considered;
the penalty argument required there to be a breach of contract. Leaver provisions setting out a clear process on forfeiture mean an employer can rely on these and avoid any reliance on breach of a promise not to be a bad leaver;
bad leaver provisions should be clearly drafted and consistent with other related documents.
Employers can now feel confident in continuing to use bad leaver provisions where appropriate, with clear and careful drafting.
