Stock Option Plans and the Condition of Presence: A Sensitive Matter under French Regulations
By Katell Déniel-Allioux
Salans & Associés SCP
Generally, stock option plans stipulate a condition of presence within the Company for the beneficiary to be entitled to vest his/her options.
French case law admits the validity of these types of clauses, i.e. possibility to vest options on condition of being an employee of the Company at the vesting date. Then, subject to the terms and conditions of the stock option plan, employees made redundant before the vesting date may validly lose their related rights. To be enforceable vis-à-vis the employees concerned, the employers must have duly informed the potential beneficiaries of the terms and conditions of the Plan.
However, the French Supreme Court also considers that in case of unfair termination (as any termination of an employment contract, at the employer’s initiative, must be sustained by a “real and serious” cause under French law), an employee whose contract is considered as unfairly terminated is eligible for a financial compensation for the prejudice suffered due to the loss of non-vested options. Then, the delicate question for the Court is how to determine the relevant compensation…
The legitimate purpose of the presence clause (recognized as such by the French Supreme Court) is obviously for the companies to establish a strong link between the capacity of employee and the capacity of shareholder and to avoid that third parties without any contractual link become shareholders.
However, in a recent case law (Cass. October 21, 2009) involving an employee deprived of unvested options due to a termination for gross misconduct, the Supreme Court also recalls that the stock option plan must comply with the provisions of Article L1331‑1 of the French Labor Code which prohibits pecuniary sanctions. In the case at hand, beneficiaries of the plan would be deprived of their rights only in a case of termination for gross misconduct. The Judges consider that limiting the deprivation of the rights under the plan to termination for gross misconduct was obviously a pecuniary sanction. Concretely, the fault which justified the termination of the contract could not deprive the employee of any remuneration or even potential gain (options).
Then, if a condition of presence in a stock option plan is still valid, the condition must be drafted carefully.