Shares may not be the ‘juicy carrot’ they appear to be: Katz
Accepting shares in your employer’s company may seem like a “no-brainer,” but doing so may not be as beneficial as it appears, says Toronto business lawyer Anton Katz.
“In some cases, you could even be worse off,” says Katz, principal of Anton M. Katz Barrister and Solicitor.
“At first glance, it may look great, but upon closer scrutiny, that carrot that they’ve dangled in front of you may not be as juicy or as tasty as it might appear,” he tells AdvocateDaily.com.
Whether an employee is better or worse off largely depends on whether there is an existing employment contract — and what it contains, explains Katz.
Without an employment contract or restrictive covenant agreement, the employer’s ability to prevent a former employee from soliciting customers or employees of the company, may be far less clear.
But then you accept shares and sign a shareholder agreement and that could all change, says Katz.
“So, you go from having no written covenants restraining you to signing a shareholder agreement, only to discover you may have unwittingly signed on to covenants, obligations, and so forth, that you never had before,” he says.
“While the common law may have previously placed such constraints on you, now you’ve signed an agreement, which may make those constraints clearer and more extensive.”
Katz says shareholder agreements can also “bargain away” entitlements included in employment contracts. For example, a worker could have a clause in their employment contract that entitles them to a lengthy notice period or pay in lieu of notice.
“But then the employee signs a shareholder agreement and he may have bargained away such entitlements,” he says. “The agreement may provide for a payment for the employee’s shares, but it may not address termination pay. And if the payment for shares exceeds statutory notice entitlements, there may be an argument that the payment is for the shares and for the notice period.”
So, in the end, employees may have bargained away valuable benefits for little in return, says Katz.
“Sometimes, the power of the shares may be somewhat illusory because it may be that the shares don’t confer an outright entitlement to dividends or maybe they’re non-voting.”
Katz says an employee should ask themselves some questions before accepting. Are they voting shares? Is the shareholder entitled to dividends outright or is it at the discretion of the directors in terms of the amount and the frequency — and if dividends are even declared? What happens to the shares if the company is sold? Are they redeemable?
“If they are redeemable by the company, then they can be taken back,” says Katz. “And does that mean that the employment also comes to an end?”
He says employees may be better off asking for a salary increase or to amend the bonus structure — something with a visible financial benefit and no ambiguity.
Before agreeing to accept shares, Katz advises workers to be skeptical and read the agreement very carefully.
“When first presented with the offer, it seems like a win-win,” he says. “But you could be signing away valuable entitlements for shares that have no power and very little financial benefit.
“Read carefully, be skeptical, and by all means, have it reviewed by a lawyer who is well-versed in shareholder agreements,” says Katz.