Thanks to Marco Boscariol for collaborating on this article
Stock option plans may obligate employees to sell shares allocated to them as a result of their participation in such plans to other shareholders, if their employment relationships are terminated. This is what the Court of Milan clarified with decision issued on October 20, 2022.
On October 20, 2022, the Court of Milan issued a decision (the “Decision”) concerning the validity of certain provisions of a stock option plan.
Namely, it clarified that stock option plans may obligate employees to sell shares allocated to them as a result of their participation in such plans to other shareholders if their employment relationships are terminated.
The case
A company approved a stock option plan and offered some employees and directors the option to buy company shares at a symbolic price.
The plan stated that in the case of termination of the employment relationship with the company (without distinction between good and bad leavers), the employees had the obligation to sell their shares to other shareholders willing to buy them (i.e., by granting other shareholders an option to purchase employee shares).
Some employees whose employment relationships had been terminated refused to sell their shares to other shareholders who had stated their intention to exercise their option rights.
This refusal was based on several arguments:
- the obligation to sell shares was discriminatory since it applied only to employees who received shares based on the stock option plan and not to the majority shareholder;
- the determination of the sale price (based on the company’s net assets and not on the market value of the shares) was not fair;
- applicable provisions of law on redemption of shares should have applied.
The Decision of the court of Milan
The court rejected the employees’ arguments and clarified that stock option plans may obligate employees to sell their shares once their employment relationships are terminated.
As to the discriminatory nature of the provision, the court argued that there was no discrimination: different rules can apply to employees and majority shareholders based on their different positions and due to the underlying purpose of allocating shares to them under a stock option plan. Specifically, the Decision stated that the purpose of a stock option plan is to increase employee loyalty to and engagement with the company (which clearly does not apply in the case of a majority shareholder).
As a consequence, the provision whereby an employee is bound to sell their shares upon termination of their employment relationship is valid since it is consistent with the purpose of the plan. However, that principle does not apply to majority shareholders, given that in their case interest in preserving the stability of the corporate structure prevails.
The court also rejected the employees’ argument regarding the sale price. It stated that even if a stock option plan requires employees to sell their shares at a price that does not reflect market value, that price determination does not invalidate the transaction, as employees are in any case benefiting from the sale as the sale price is higher than the symbolic value applied when they purchased the shares.
Finally, the court determined that rules on the redemption of shares are not applicable. The employees purported that rules for determining the value of shares for redemption were violated by the provisions of the stock option plan that indicated the company’s net worth as the parameter used to determine the sale price of the shares. The court said these rules do not apply to limited liability companies (as in the case in question) absent any provision supporting this argument. In addition, the court stated that even when said rules are applied, the criteria are not mandatory: different criteria can be provided in the bylaws.
Conclusions
When stock option plans are established, the ongoing employment relationship with the company is the reason underlying the allocation of shares to employees: option rights are granted to certain individuals because of their employee status, and the plan is designed to retain and motivate key employees.
Therefore, a provision that requires employees to sell shares received based on a stock option plan in case of termination of their employment relationships is valid, even if the sale price is based on criteria other than the market value of the shares.
