Use of Equity Compensation to Retain High Level Employees

Equity compensation, such as stock options, restricted stock units, and performance shares, are often used to retain high level employees. Equity compensation can be an incredibly useful tool for retaining quality employees, but if the equity compensation is not awarded properly, litigation can result. Employers and boards of directors should be aware of the risks associated with equity compensation in order to avoid litigation and to protect themselves in the event that litigation results.

Equity compensation consists of granting certain employees stock options with the right to exercise those rights at a predetermined price. The right to exercise stock options vests over time so the employee gains control over the stock option once he or she has been employed by the company for a specific period of time or has fulfilled a certain performance milestone.

Equity compensation is frequently used by startup companies to attract employees since the business may lack the capital to compensate employees through a traditional salary. But equity compensation is also used to retain high-level employees in established companies.

Business disputes regarding equity compensation often arise following termination of the employee who has received the equity compensation. Some common disputes that result in business litigation include:

• Vesting and exercise. Disputes regarding when the stock options vest and when the employee can exercise their rights to the equity compensation units often arise.

• Stock plan administration, including control and exercise rights over stock units.

• Bankruptcy. Disputes regarding the inclusion of equity compensation in the bankruptcy estate may arise in the event that the company faces financial difficulties prior to the vesting or exercise of the rights.

• Allegations of corporate waste. Equity compensation awarded to directors could be viewed as a corporate waste of assets that survives the “business judgment rule” if the directors have a financial interest in the equity compensation awards. For instance, a Delaware Chancery Court recently held that an allegation of corporate waste could survive a motion to dismiss because the directors granted restricted stock units to themselves.

• Divorce. Because equity compensation is a common tool for closely-held businesses, including business partnerships, disputes can arise when a partner or equity employee divorces regarding whether the equity compensation is included in the marital estate.

The terms and requirements of equity compensation can be incredibly complex with far-reaching financial and legal implications. If your company is involved a business dispute regarding equity compensation, you may wish to consult with a knowledgeable business litigation lawyer like the Chicago business litigators at Lubin Austermuehle.

Our Chicago business law attorneys focus on representing clients who are facing complex business disputes, including disputes regarding equity compensation. Our strong knowledge of the law and our vast litigation experience enables our Chicago business litigation attorneys to quickly analyze the strengths and weaknesses of your case. Contact our office at 630-333-0333 to learn more about equity compensation business disputes. You can also contact us online.