As a senior executive contemplating a move, how to protect your equity should be at the forefront of your mind in terms of optimising your strategy before you officially resign. This is especially so because your company is not necessarily obliged to remind you about any equity or deferred profits or bonus you might be entitled to under any relevant schemes, so the onus is on you to make sure your exit is tactically timed with maximum financial benefit for you. In this alert, Partner Merrill April and Associate Sophie Rothwell highlight five key steps you should consider.
1. Work out what your entitlement is and which factors can affect it
This sounds simple, but we have seen instances of complex schemes where regular updates of which awards have vested and notification of satisfaction of performance criteria have not been given, so that full entitlement is unclear and lies in the hands of the organisation. It is very important to know what you are entitled to before entering into any negotiation where the organisation may be asserting a discretion. For instance, those in the private equity sector may have ‘carried interest’ linked to the performance of a particular investment fund which they were involved with, or senior executives in general business may have rewards linked to the company’s long-term growth and success or tied to their length of continuous service. Awards can also be given in the form of deferred bonuses or shares/ options over shares in the company which are vested over a certain period. Many of these are subject to forfeiture or even clawback in some circumstances Determining what you are entitled to is therefore a vital first step when adopting the best strategic approach to your exit.
2. Ensure you gather all relevant documentation, such as the rules or the scheme itself, any units assignment agreements, any award grants, your employment contract and any other ancillary documentation referred to therein.
The documentation governing equity and awards can often be complex, full of legal jargon and linked to various other ancillary documents. You must therefore carefully consider the provisions of such agreements, particularly whether the Company has discretion under the relevant schemes. The existence of such discretion will typically provide the foundation for negotiations as to why it should be favourably exercised and in turn feed into the overall strategy formulation. Public companies (particularly those in regulated sectors such as financial services) are often more limited in their ability to exercise discretion over the provisions of incentive agreements and review of the relevant Remuneration Policy will be key in these situations. It would be unfortunate to be tripped up by the existence of other related documentation that contain relevant provisions that need to be considered in the round; make sure to conduct a thorough due diligence of all relevant documentation.
3. Determine whether any part of the scheme and associated documents can be legally challenged.
Linked to step two above, entitlement to equity/carry/deferred remuneration under the specific incentive plan can often be subject to restrictive covenants, separate from any that may be contained in your employment contract. They typically tend to be non-compete covenants as a deterrent to prevent you from moving to a competitor. However, the rules relating to enforceability of restrictive covenants in the English courts remain equally relevant, whether the covenants are contained in an employment contract or incentive plan. In order to be enforceable in England and Wales, covenants must be carefully drafted in a manner that only goes so far as is reasonably necessary so as to protect a legitimate business interest. If a covenant is drafted too widely then there may be room to challenge it. It is important also to pay attention to any provisions for jurisdiction and governing law in the documentation because this is likely to affect arguments relating to challenging enforceability. For instance, in England and Wales, if a covenant is found to be drafted too widely then it will typically be deemed void in its entirety and unenforceable, whereas under German law, widely drafted covenants can be redrafted by the courts to render them enforceable with changes. If multiple jurisdictions are in play, then it will be necessary to coordinate advice internationally so that a multi-jurisdictional strategy can be formulated. This is a particularly pertinent point for those in the private equity sector, as funds (to which carry is linked ) can often be established in overseas jurisdictions and subject to different laws and legal interpretation and therefore different tactics may be required.
The potential of challenging enforceability can also be a useful leverage point. If, for instance, a particular covenant under a carry plan would apply to a section of employees rather than you as an individual, and there is the potential for you to seek a public declaration as to unenforceability from the courts which could open the doors for mass exits from affected employees, this may be relevant to how the company decides to exercise its discretion in your case.
4. Map out a timeline for when all of your awards/carry will vest.
Taking account of timing is a vital part of strategy formulation because it will help you determine any additional leverage you may have in exit discussions. This is essentially a bartering exercise: think of what you can deliver for the company and balance this with what you want to take. Is there a big deal or project that requires your input and for which you are a vital resource which will bring the company a great deal of profit? Consider also the requirements of any new employer and where potential non-competes apply, do not over-promise.
Additionally, as mentioned above, sometimes equity / awards can be linked to your length of service on either an annual, quarterly or even monthly basis, so it can pay to time your departure to maximise your vested equity/awards. For instance, if you started your role on 1 January 2018 and were planning on leaving on 30 May 2022, changing your last day to 1 June 2022 could mean you benefit from another month’s worth of equity.
5. Honesty is the best policy.
When it comes to exit planning and discussions, it is prudent to be cautious about giving too much information away to your employer. However, often your employer is a business operating in a small and close knit sector, where it is expected that employees will come from and go to a competitor from time to time. It is typically in the best interests of both sides to discuss matters upfront when you are ready to leave, so that you can both move on with an agreed understanding upon exit. This can include agreeing an extended or shortened notice period depending on the needs of the business, potentially agreeing a shortened non-compete list or a “white list” of companies and disclosing which company you are moving to and what role you will be taking; this removes the potential of you being met with injunctive proceedings for breaching a covenant upon commencing your new employment, or unexpectedly forfeiting your equity and then being on the backfoot having to sue your previous employer for your lost equity.
If you are a senior executive or founder considering resignation, you have any other questions arising from this alert, or for specific legal advice on particular circumstances, please contact our Partner Merrill April and Associate Louise O’Connor, both of whom specialise in employment and partnership issues for multinational employers, senior executives, partnerships and partners.
View our 5 Top Tips when Making a Strategic Move as a Senior Executive here.
Read our Little Book of Senior Executives: Appointments and Agreements here.
Download Our Work for Private Equity Executives brochure here.
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