Firms look at litigation exposure on share schemes

As financial services firms re-evaluate existing employee share scheme arrangements following the Government’s Budget announcement last week, advice is also being sought on potential litigation suits that could arise from ensuing contractual changes.

“Everybody’s terribly concerned about [re-evaluating], not just from a perspective of ensuring that their executives operate in accordance with all corporate governance standards, but also the exposure to them from a litigation front,” said Lesley Maclou, partner and principal at Harmers Workplace Lawyers.

“There is a myriad of case law that shows us when senior executives exit, or when there are issues as to performance, any potential payments owed under any incentive schemes always are thrown into the ring.”

Maclou said properly drafted share and incentive schemes would have inherent in them a large element of discretion, and it is this contractual right that is now allowing a number of companies to either suspend or review their schemes.

“You’ll find a lot of plans will have the discretion in there, and us lawyers ensure that we draft those sort of discretions in, because year to year, performances of a company, even in a good time, change. So you need the discretion to review those remuneration systems.”

Maclou said the wording in contracts will need to be looked at to decipher what discretions are actually contractually, expressly or implicitly provided in the arrangements.

“But that’s a huge issue for employers, because if there have been any steps skipped in certain levels of executives’ plans or things haven’t been issued or rules were going to be finalised or amended and it hasn’t been done, obviously that may give rise to greater exposure.

“But by the same token, if they’ve been drafted well, they will have the ability then — which I understand many of them are doing — to sit down and review remuneration schemes across the board.”

While it is uncertain what the Budget changes are precisely going to mean for existing scheme arrangements, Maclou noted that employers may not necessarily be able to fall back on the Government’s changes as basis for amending employees’ contracts.

“Is it a case that the changes at Government level are just going to mean greater cost to the employer or are they actually going to, by statute, prohibit them from operating the scheme? Now those are two completely different questions,” Maclou said, adding that if it doesn’t prevent an employer from operating a scheme, it may simply affect the tax benefits for an employee, or increase the cost to the business.

There are also other issues to consider, Maclou said, including when the changes would apply — they could act retrospectively.

“There’s a lot that’s still outstanding in terms of exactly how this is going to play out.

“What it goes down to rather is whether or not it continues to be a good and cost effective incentive for employers to use, as opposed to, ‘Do we still have a contractual arrangement that we have to honour?’”