Incentive warrant programs
– how do companies handle employees who leave?
Offering its employees to be part of a warrant program can be a good way for companies to stimulate employees to perform their utmost in the daily work while the participants in the program get the opportunity to take part in internal and external values developed by the company. A warrant program may be a good tool to use in order to combine the employees 'incentives to create value and positive results in the company with the shareholders' interest of developing company and share value.
Warrant programs can be designed in different ways and can be aimed at different categories within the company. The most common is that participants in a warrant program are given the opportunity to subscribe for or acquire warrants that in the future entails a right to subscribe for a certain number of shares in the company on predetermined terms. When outlining a warrant program, the company should ask itself whether the employees' right to warrants should be affected by the employee terminating his or her involvement in the company during the course of the program.
In cases where the warrants are not offered to employees as a reward for work already performed, it is a common practice for employees to enter into a special so-called repurchase agreement in connection with the warrants in question being granted. Through the agreement, the employee undertakes to offer the company to re-purchase all or parts of the warrants allocated to the employee within the framework of the program if the participant's employment in the company ends before the expiry of the warrant program. Such agreements often regulate that the participant “earns” (so-called vesting) a certain number of warrants during a certain period of time and that such earned warrant cannot be repurchased by the company upon termination of employment. Provided that the participant is employed during the entire program period, he or she will at the end of the term of the program have earned all warrants and may use these to subscribe for shares in the company.
In cases where participants are subject to vesting and terminate their employment prior to expiry of the program, it needs to be determined how many warrants the company has a right (but no obligation) to re-purchase and the price is to be paid for such warrants. The price when re-purchasing non-vested warrants is usually determined by whether the employee is considered a so-called "Good Leaver" or "Bad Leaver", where Good Leaver is usually defined by situations usually beyond the employee's control, such as incapacity to work due to illness or accident. Such definition may also sometimes include the company terminating the employee without relevant reason. On the other hand, a person is usually considered a Bad Leaver if he or she resigns by own initiative, is termination by the company on objective grounds or is dismissed. If an employee is considered Good Leaver, the valuation of non-vested warrants will as a main rule be more favorable for the participant as a Good Leaver usually sells the warrants back to the company at market value. If considered a Bad Leaver, the company usually has the right to acquire non-vested warrants from the employee at the lowest amount of the (i) acquisition value or the (ii) market value.
Since the underlying motives behind a warrant program usually are to stimulate and retain employees, it is of great importance when outlining the program to consider how participants who end their involvement in the company should be handled within the framework of the program. Companies that do not consider this and other relevant aspects in connection with the implementation of an incentive program run the risk that the program will have effects that materially differ from those initially desired.
/MAQS law firm 2021-01-10