A proposed exit can put a surprisingly valuable part of your remuneration at risk. So, do settlements affect shares? They can, particularly where you hold share options, restricted stock, growth shares or awards under an employee incentive plan. But the answer is rarely found in the settlement agreement alone. Your plan rules, employment contract, articles of association and shareholder agreement may all affect what happens next.
Before signing, you need clarity on exactly what you own, what has vested, the date your employment ends and the consequences of being classed as a good leaver or bad leaver. A settlement agreement may confirm those outcomes, improve them through negotiation, or leave important questions unresolved.
Do settlements affect shares and share options?
A settlement agreement can affect shares in two main ways. First, it can set the employment termination date that triggers the share plan’s leaver provisions. Secondly, it can include express promises about how the employer will treat your shares, options or awards.
However, an agreement between you and your employer does not automatically override the rules of a separate share scheme or the rights of other parties. For example, the plan rules may give discretion to trustees, a remuneration committee or the board. The company’s articles may require shares to be transferred on leaving employment. If these documents are not properly addressed, a broad statement that you may retain your shares may offer less protection than it appears to.
This is why the documents should be read together, not in isolation. A settlement agreement is legally significant, but it should accurately reflect the share arrangements that apply to you.
Shares you already own
If you hold ordinary shares outright, leaving your job does not necessarily mean you lose them. Yet many private companies have provisions requiring an employee shareholder to offer their shares for sale when they stop being employed. The price may depend on whether you are a good leaver, bad leaver or neither.
A good leaver might receive market value or a valuation set under the articles. A bad leaver may have to sell at a lower price, sometimes the amount originally paid. The definitions matter greatly. A departure described as resignation, dismissal for misconduct or termination for poor performance can have very different consequences from redundancy or a mutually agreed exit.
The settlement agreement should state the agreed reason for termination where this is relevant. It may also need a clear provision confirming your leaver status, the number and class of shares affected, the valuation basis, who will buy the shares and when payment will be made.
Options and unvested awards
Options and other awards are more commonly lost or reduced on termination. Many plans provide that unvested options lapse when employment ends, unless the board exercises discretion. Vested options may need to be exercised within a short period, often 30, 60 or 90 days. Missing that window can mean losing the option altogether.
It is therefore not enough to agree a termination date without checking the share plan timetable. If the employer is asking you to leave quickly, ask whether your exercise period will be extended, whether outstanding awards will vest, and whether you will be allowed to exercise before your last day.
For senior employees, a share award may be one of the largest parts of the overall package. The appropriate settlement figure should reflect what you stand to lose if the employer will not preserve the award or exercise discretion in your favour.
The importance of good leaver status
Good leaver status is often the central issue in a settlement involving shares. It is not a universal legal concept. Its meaning comes from the particular plan, articles or shareholder agreement.
Typically, redundancy, ill health, retirement, death, disability or termination at the company’s request may qualify. Resignation and dismissal for gross misconduct may not. But the wording can be narrower or broader than expected. Some plans treat a mutually agreed departure as a good leaver only if the board decides it should.
A settlement agreement provides an opportunity to seek certainty. Rather than relying on informal assurances, it may be sensible to record that the company will treat you as a good leaver for the purposes of named documents and awards. If board or trustee approval is required, the agreement should say that the employer will procure that approval, where it can properly do so.
There may be commercial limits. An employer may agree to a cash payment instead of allowing you to retain an option, particularly where it does not want a departing employee to remain on the cap table. The key is to compare the proposed payment with the likely value and future potential of the award before accepting it.
What should be checked before you sign?
Start by gathering the relevant paperwork. This usually includes your option agreement or award notice, the share plan rules, any shareholder agreement, the company’s articles of association and correspondence confirming past grants or vesting. If you are unsure whether an award has vested, do not assume that a payroll payslip or internal portal tells the full story.
Your legal review should identify whether the agreement deals with the following points:
- your precise termination date and the reason recorded for your departure;
- good leaver, bad leaver or other leaver classification;
- whether vested and unvested options lapse, accelerate or remain exercisable;
- the exercise deadline, exercise price and practical process for exercising options;
- any compulsory share transfer, valuation method and payment date; and
- the tax treatment of payments, option exercises and share disposals.
It is equally important to check for inconsistencies. For instance, an agreement may say that you will be treated as a good leaver, while a side letter says your options will lapse on termination. If terms conflict, you need a clear answer before you waive your employment claims.
Tax can change the real value of the deal
Share arrangements can have complicated tax consequences. The treatment depends on the type of shares or option plan, when an option is exercised, the value of the shares and the circumstances of the departure.
For example, Enterprise Management Incentive options can offer favourable tax treatment where the statutory conditions are met, but a post-termination exercise may need to happen within a prescribed period to preserve that treatment. Changes in working time before departure or amendments to the option can also matter. Other option arrangements may create income tax and National Insurance liabilities on exercise or on the release of restrictions.
A settlement payment made in exchange for giving up an option may also be taxed differently from compensation for loss of employment. You should not accept a figure on the assumption that it will be tax-free simply because it appears in a settlement agreement. The agreement should specify the intended tax treatment, but wording alone cannot guarantee HMRC will accept it.
Where the sums are material, tax advice may be needed alongside employment-law advice. This is especially true where the company is private, the valuation is uncertain or a sale, investment round or flotation is anticipated.
Can you negotiate better share terms?
Often, yes. Whether there is room to negotiate depends on the strength of any potential employment claims, the employer’s desire for a clean exit, the value of the awards and the discretion available under the plan.
A practical proposal might be to preserve vested options for a longer exercise period, accelerate part of an unvested award, confirm good leaver treatment or pay cash equal to an agreed value. If the company insists on buying your shares, you may be able to negotiate the valuation date, an independent valuer or payment in instalments with protection if the company is later sold.
Do not overlook related terms. A restrictive covenant, confidentiality clause or unfavourable reference can affect your next role, while a payment in lieu of notice may affect the termination date relevant to your awards. A fair outcome looks at the whole package, not just the headline compensation figure.
When the settlement agreement is silent
Silence does not necessarily mean your share rights are safe. It may mean the existing plan rules continue to apply, including any automatic lapse or compulsory transfer provisions. If shares are valuable or even potentially valuable, ask for the position to be confirmed in writing.
Employers should also take care here. A poorly drafted agreement can create uncertainty over leaver status, board discretion and tax withholding. Clear drafting protects the company while giving the departing employee a reliable understanding of what they are receiving and giving up.
Independent legal advice is required for a settlement agreement to validly waive statutory employment claims. That advice should include checking whether the agreement properly deals with the employment issues that may affect your shares. At Arcos Settlement Agreements, the focus is on explaining the practical effect of the terms in plain English and identifying points that may need clarification or negotiation.
A settlement agreement can give you a clean and confident transition, but only if its treatment of shares matches the documents behind it. Before you sign, make sure you know not only the value being offered today, but also what you may be giving up tomorrow.