By: Farrah Rahman
Trust is a big part of any deal, and a situation where you’ve been hired and promised shares but never received any is a major breach of that trust. But does that trust translate into something legally binding, that when broken, gives you options for legal action?
The answer is in the details. When you say an employer has “promised” an employee shares, that can mean a few different things. If a verbal or oral agreement was made, it can be difficult to prove, even if it would otherwise be legally binding. If the shares were promised in a written agreement but never delivered, it can be much easier to force the employer to make good on the promise.
Whether or not a verbal agreement is legally binding and enforceable depends on a number of important facts.
First and foremost is an employee’s ability to prove that a verbal agreement took place. This will require trustworthy testimony, and a clear reference to it in emails, messages, documents, journals, and so forth can be especially helpful. In cases like Druet v. Girouard (2012) (NBCA), email strings were accepted as verification of consent even when the electronic signatures themselves were disputed for not being totally accurate reflections of a person’s written signature. Supporting evidence lends weight, so don’t underestimate the importance of sifting through those emails!
Once the verbal exchange is proven to have taken place, the question becomes whether the elements of a binding agreement are present: an offer, acceptance, and consideration. That means there should be an identifiable exchange of something for the promise made, like money, or agreeing to accept a job in exchange for the promise of shares, to make the promise legally enforceable.
In the case of Fedel v. Tan (2010) (ONCA), Tan and Fedel started a new business together. They verbally agreed that Fedel would retain 60% ownership for organizing and administering the business, while Tan would retain 40% ownership for his financial involvement. Upon incorporation, Fedel received 100% of the shares issued, and Tan received none.Tan sued, and the judge looked at Tan and Fedel’s shared business history to determine that Tan had been entitled to 40% of the company. However, the judge decided against issuing shares to Tan. Because the business relationship between Tan and Fedel had been irreparably harmed by the dispute, ownership of shares in a closely held corporation would no longer have been a satisfactory result. The remedy instead was compensation.
So if you are entitled to shares, and can prove it, a court will still look at the particular circumstances to decide what the appropriate remedy will be, and this may not be the promised shares.
If your employment agreement contains a provision entitling you to a particular number of shares at a particular point in time and you do not receive those shares, you may be able to bring an application in court to compel the employer to transfer the shares to you according to the terms of the employment contract.
Of course, this will not enhance the quality of your relationship with your employer! You are better off trying to use friendly channels to obtain the shares.
Before doing so however, you will need to look into the details of the contract. Often, employees or contractors will sign a stock restriction agreement. This contract usually provides that you are entitled to a certain number of shares that will vest over a period of time, for example X number of shares on July 20 each year, or X number of shares on the last day of each month. Until the shares have vested they are ‘restricted.’ Restricted shares can usually be redeemed (bought back) by the company at a very low price if your contract with the company is terminated, or if other trigger events take place (e.g., you are convicted of certain types of crimes). Often you are not entitled to vote restricted shares, and you may not be entitled to any dividends that have been declared. If you are terminated, you will not have a right to the promised shares if they have not yet vested.
Another common way for employees to believe they have been promised shares is under an Employee Stock Option Plan (ESOP). Your contract may entitle you to a certain number of options per year, or you may only be eligible to receive options if the directors use their discretion to grant options to you in any given year. It is important to check the fine print of the plan to determine what you are entitled to.
Once you have been granted options you will be able to exercise them to purchase shares at a set price. You will likely only exercise this option if the share value is at or above the purchase price. Note that the options will have an expiry date and many plans will specify that the company has the right, but not the obligation, to buy back any shares purchased under an ESOP if the employee’s contract is terminated for any reason.
To see standard versions of the agreements discussed in this article, visit our Small Business Law Library!
This blog was co-written by Alina Butt.
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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos.
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