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How can Exiting Senior Executives Protect their Equity Interests?

We recently published a news alert highlighting the most common queries we have been receiving from senior executives in the current climate, one of which was “how can exiting senior executives protect their equity interests?

For a senior executive or partner who is facing an exit from the workplace, whether by reason of redundancy, retirement or otherwise, a pivotal concern will be the protection of their equity interests.

The starting point for senior executives in such a scenario should always involve a careful review of the documents in question, such as a carried interest or share incentive scheme, in order to clarify what they are entitled to, what the company has discretion over, and what there may be no discretion over. Many equity documents do provide that a senior executive who has been made redundant will be deemed to be a good leaver and will be paid the market value for their shares. However, few documents treat constructive dismissal as a good leaver event; therefore, good leaver treatment may need to be negotiated as part of the exit package.

It is important to consider whether the rules of the relevant schemes provide for accelerated vesting in certain conditions or whether they confer a discretion upon the company to grant accelerated vesting. Where a discretion does exist, the executive’s argument as to why the discretion should be exercised in their favour will usually be based on the exact provisions of the scheme. For example, it may be the case that the executive’s historic awards have been as a result of personal performance conditions being satisfactorily achieved. In such a case, the executive may argue that for the company not to grant accelerated vesting would be an unfair exercise of their discretion, a topic we have discussed previously.

It is sometimes the case that equity schemes put in place by companies, particularly public companies, do not contain any provision allowing for the exercise of discretion. In such situations, it is even more important for the executive to obtain timely specialist advice regarding the circumstances of their proposed exit from the company. It may be the case that negotiations result in an agreement whereby the executive’s equity interests are protected, or that the executive accepts a compensation payment in lieu of the equity interests they will have sacrificed.

For senior executives facing an exit from the workplace, it is not sufficient to simply aim to depart with their equity intact. It is vital that they also look ahead and consider how their equity could be adversely affected after their employment has ended. It is also crucial that they seek the appropriate advice on their ongoing post-termination obligations under the equity documents (such as restrictive covenants, non-disparagement provisions and confidentiality provisions), the breach of which could result in bad leaver treatment or clawback of equity.

Aside from purely financial considerations, a departing senior executive will be mindful that the job market is likely to be more difficult in the current climate and will be looking to maximise their employment opportunities. Where an executive is being made redundant, there may be scope to negotiate release from some restrictions, such as the non-compete provisions, so that they can continue to make a living whilst also retaining their equity.

Our firm has extensive experience in advising senior executives on what actions they can take if their equity interests are at risk as a result of a foreshadowed departure from the workplace. If you would like to discuss any of these issues further, or for guidance on your specific rights, responsibilities and potential liabilities, please contact Merrill April (Partner) who specialises in employment and partnership law issues for multi-national employers, senior executives, firms and partners.